Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K/A or any amendment to
this Form 10-K/A. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). [X] Yes [ ] No
The aggregate market value of voting stock held by non-affiliates of the
registrant as of June 28, 2002, determined by using a per share closing price of
$19.42, as quoted by NASDAQ on that date, was $5,007,762,672. As of February 28,
2003, 230,832,180 shares of common stock without par value were outstanding.
Part III of this Form 10-K/A incorporates by reference certain information
from the registrant's definitive Proxy Statement for the 2003 Annual
Shareholders' Meeting.
Huntington Bancshares Incorporated (Huntington) originally filed its
Annual Report on Form 10-K for the fiscal year ended December 31, 2002, with the
Securities and Exchange Commission (SEC) on March 20, 2003. Huntington filed
Amendment No. 1 to its Annual Report on Form 10-K/A (Amendment No. 1) on May 20,
2003, for the purpose of restating its financial results to reclassify certain
automobile leases from the direct financing lease method to the operating lease
method of accounting. Additional information with respect to the restatement
reflected in Amendment No. 1 is provided in Note 3, "Restatement of Financial
Condition and Results of Operations for Operating Leases," to Huntington's
consolidated financial statements (Consolidated Financial Statements) included
in Item 8 of this report.
This Amendment No. 2 to Huntington's Annual Report on Form 10-K/A
(Amendment No. 2) is being filed to correct and restate Huntington's
consolidated financial condition at December 31, 2002 and 2001 and its results
of operations for each the three years ended December 31, 2002, and each of the
interim periods in 2002 and 2001 to:
o apply, on a retroactive basis, deferral accounting for loan and lease
origination fees and costs;
o correct for certain timing errors related to origination fees paid to
automobile dealers, deferral of commissions paid to originate deposits,
certain mortgage origination fee income, the recognition of expense for
pension settlements, liabilities related to the sale of an automobile debt
cancellation product, income related to a 1998 sale leaseback transaction,
the recognition of a gain on an interest rate swap initiated in 1992 and
sold in 2000 and the recognition of income on Bank Owned Life Insurance in
2001 and 2002; and
o reclassify tax consulting expenses from income tax expense to professional
services.
All of the above are described in more detail in Note 4, "Restatement of
Financial Condition and Results of Operations for Deferral Accounting and Other
Revenue and Expenses," to Huntington's Consolidated Financial Statements
included in Item 8 of this report. In addition, this Amendment No. 2 is being
filed to amend:
o Item 6, Selected Financial Data, to take into account the effects of the
restatement;
o Item 7, Management's Discussion and Analysis of Financial Condition and
Results of Operations, to take into account the effects of the
restatement and to provide additional disclosures relating to certain
items of non-interest expense;
o Item 7A, Quantitative and Qualitative Disclosures About Market Risk, to
take into account the effects of the restatement;
o Item 14, Controls and Procedures, to comply with changes in the SEC
regulations which became effective in August 2003; and
o Item 16, Exhibits, Financial Statement Schedules, and Reports on Form
8-K, to update certain exhibits to take into account the effects of the
restatement and to comply with changes in the SEC regulations which
became effective in August 2003.
This Amendment No. 2 corrects and restates the original Annual Report
on Form 10-K, as amended by Amendment No. 1, but continues to speak as of the
date of the original filing of the Form 10-K on March 20, 2003. Huntington has
not updated the disclosure in this Amendment No. 2 to speak as of a later date.
All information contained in this Amendment No. 2 is subject to updating and
supplementing as provided in the periodic reports filed subsequent to the
original filing date with the SEC.
Part II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
The common stock of Huntington Bancshares Incorporated is traded on the NASDAQ
Stock Market under the symbol "HBAN". The stock is listed as "HuntgBcshr"
or "HuntBanc" in most newspapers. As of February 28, 2003, Huntington
had 29,894 shareholders of record.
Information regarding the high and low sale prices of Huntington Common Stock
and cash dividends declared on such shares, as required by this item, is set
forth in Table 24 entitled "Quarterly Stock Summary, Key Ratios and Statistics,
and Capital Data" on page 51 of this report. Information regarding restrictions
on dividends, as required by this item, is set forth in Item 1 "Business-Regulatory
Matters-Dividend Restrictions" on page 5 and in Notes 18 and 26 of Notes
to Consolidated Financial Statements beginning on pages 92 and 104, respectively,
of this report.
ITEM 6: SELECTED FINANCIAL DATA
TABLE 1 - SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31,
(in thousands of dollars, -------------------------------------------------------------------------------
except per share amounts) 2002 2001 2000 1999 1998
------------ ------------ ------------ ------------ ------------
SUMMARY OF OPERATIONS
Total interest income $ 1,293,195 $ 1,654,789 $ 1,833,388 $ 1,795,214 $ 1,811,050
Total interest expense 543,621 939,501 1,163,278 982,370 978,271
------------ ------------ ------------ ------------ ------------
Net interest income 749,574 715,288 670,110 812,844 832,779
------------ ------------ ------------ ------------ ------------
Provision for loan and lease losses 194,426 257,326 61,464 70,335 81,926
Securities gains 4,902 723 37,101 12,972 29,793
Gain on sale of Florida operations 182,470 -- -- -- --
Merchant Services gain 24,550 -- -- -- --
Gains on sale of credit card portfolios -- -- -- 108,530 9,530
Non-interest income 1,129,782 1,199,219 1,086,101 933,356 780,764
Non-interest expense 1,325,174 1,482,470 1,283,131 1,147,988 1,080,504
Restructuring charges 48,973 79,957 -- 46,791 90,000
------------ ------------ ------------ ------------ ------------
Income before income taxes 522,705 95,477 448,717 602,588 400,436
Income taxes 198,974 (39,319)(1) 126,299 188,433 124,464
------------ ------------ ------------ ------------ ------------
Net income $ 323,731 $ 134,796 $ 322,418 $ 414,155 $ 275,972
============ ============ ============ ============ ============
PER COMMON SHARE (2)
Net income
Basic $ 1.34 $ 0.54 $ 1.30 $ 1.63 $ 1.08
Diluted 1.33 0.54 1.29 1.62 1.07
Cash dividends declared 0.64 0.72 0.76 0.68 0.62
Book value at year-end 9.41 9.34 9.32 8.58 8.38
BALANCE SHEET HIGHLIGHTS
Total assets at year-end $ 27,432,381 $ 28,416,945 $ 28,436,295 $ 28,949,974 $ 28,242,291
Total long-term debt at year-end (3) 788,678 927,330 845,976 697,677 697,359
Average long-term debt (3) 898,128 860,637 810,543 697,523 567,938
Average shareholders' equity 2,215,776 2,328,491 2,251,530 2,126,713 2,071,787
Average total assets 25,923,138 28,076,725 28,659,977 28,674,821 26,878,997
KEY RATIOS AND STATISTICS
MARGIN ANALYSIS--AS A %
OF AVERAGE EARNING ASSETS (4)
Interest Income 6.23% 7.58% 8.13% 7.75% 8.21%
Interest Expense 2.61 4.29 5.13 4.22 4.44
------------ ------------ ------------ ------------ ------------
NET INTEREST MARGIN 3.62% 3.29% 3.00% 3.53% 3.77%
============ ============ ============ ============ ============
Return on average assets 1.25% 0.48% 1.12% 1.44% 1.03%
Return on average shareholders' equity 14.6 5.8 14.3 19.5 13.3
Efficiency ratio 70.2 75.0 70.5 63.3 64.9
Dividend payout ratio (5) 48.2 134.5 58.8 42.0 58.0
Average shareholders' equity to
average assets 8.55 8.29 7.86 7.42 7.71
Tangible equity to assets (period-end) 7.25 5.88 5.72 5.29 5.21
Tier I risk-based capital ratio 8.34 7.02 7.13 7.46 7.05
Total risk-based capital ratio 11.25 10.07 10.29 10.57 10.62
Tier I leverage ratio 8.51% 7.16% 6.85% 6.64% 6.31%
OTHER DATA
Full-time equivalent employees 8,177 9,743 9,693 9,516 10,159
Domestic banking offices 343 481 508 515 529
|
(1) Reflects a $32.5 million reduction related to the issuance of $400 million
of REIT subsidiary preferred stock, of which $50 million was sold to the public.
(2) Adjusted for stock splits and stock dividends, as applicable.
(3) Excludes capital securities and Federal Home Loan Bank advances.
(4) Presented on a fully taxable equivalent basis assuming a 35% tax rate.
(5) Based on diluted earnings per share.
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
Huntington Bancshares Incorporated (Huntington) is a multi-state diversified
financial services company organized under Maryland law in 1966 and headquartered
in Columbus, Ohio. Through its subsidiaries, Huntington is engaged in providing
full-service commercial and consumer banking services, mortgage banking services,
automobile financing, equipment leasing, investment management, trust services,
and discount brokerage services, as well as underwriting credit life and disability
insurance, and selling other insurance and financial products and services.
Huntington's banking offices are located in Ohio, Michigan, Indiana, Kentucky,
and West Virginia. Selected financial services are also conducted in other states
including Arizona, Florida, Georgia, Maryland, New Jersey, Pennsylvania, and
Tennessee. Huntington also has a foreign office in the Cayman Islands and a
foreign office in Hong Kong. The Huntington National Bank (the Bank) is Huntington's
only bank subsidiary.
The following discussion and analysis provides investors and others with information
that management believes to be necessary for an understanding of Huntington's
financial condition, changes in financial condition, results of operations,
and cash flows, and should be read in conjunction with the financial statements,
notes, and other information contained in this document.
FORWARD-LOOKING STATEMENTS
This report, including Management's Discussion and Analysis of Financial Condition
and Results of Operations, contains forward-looking statements about Huntington.
These include descriptions of products or services, plans, or objectives of
management for future operations, and forecasts of revenues, earnings, cash
flows, or other measures of economic performance. Forward-looking statements
can be identified by the fact that they do not relate strictly to historical
or current facts.
By their nature, forward-looking statements are subject to numerous assumptions,
risks, and uncertainties. A number of factors could cause actual conditions,
events, or results to differ significantly from those described in the forward-looking
statements. These factors include, but are not limited to, those set forth under
the heading "Business Risks" included in Item 1 of this report and
other factors described from time to time in other filings with the Securities
and Exchange Commission.
Management encourages readers of this report to understand forward-looking
statements to be strategic objectives rather than absolute forecasts of future
performance. Forward-looking statements speak only as of the date they are made.
Huntington does not update forward-looking statements to reflect circumstances
or events that occur after the date the forward-looking statements were made
or to reflect the occurrence of unanticipated events.
RESTATEMENTS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
AMENDMENT NO. 1
Huntington restated its financial condition and results of operations in its
Amendment No. 1 to its Form 10-K filed on May 20, 2003, to reclassify certain
automobile leases from the direct financing lease method to the operating lease
method of accounting.
The appropriate classification of automobile leases as operating leases or
direct financing leases under Statement of Financial Accounting Standards (Statement)
No. 13, Accounting for Leases, can be impacted by residual value insurance coverage.
Since October 2000, Huntington has had residual value insurance coverage on
its entire automobile lease portfolio to protect it from the risk of loss resulting
from declines in used car prices. Such losses arise if the market value of the
automobile at the end of the lease term is less than the residual value embedded
in the original lease contract. Management believes these policies effectively
protect Huntington from the risk of declining used car prices. In April 2003,
management determined that, due to provisions in certain of its residual value
insurance policies, the leases covered by these policies would not qualify as
direct financing leases.
For leases originated prior to May 2002, the residual value insurance policies
contain aggregate loss caps. The residuals insured under these policies are
not considered guaranteed, and, accordingly, the related leases fail to qualify
as direct financing leases under Statement No. 13. As a result, leases originated
prior to May 2002 have been reclassified as operating leases for all periods
presented. As of December 31, 2002, $2.2 billion of such leases, net of accumulated
depreciation, are reflected in the Consolidated Balance Sheets as operating
lease assets. All leases originated since April 2002 are covered under a new
residual value insurance policy (the "New Policy") which insures the
full residual value of each vehicle and includes no aggregate loss cap. Leases
with residual gains are netted with leases with residual losses when claims
are settled. The netting provision of the New Policy precluded Huntington from
determining the amount of the guaranteed residual of any individual leased asset
within the portfolio at lease inception. Thus, the related leases failed to
qualify as direct financing leases. Huntington has amended the New Policy, retroactive
to April 2002, by adding an endorsement that adds a level of insurance sufficient
to meet the criteria as a residual value guarantee pursuant to Statement No.
13, on an individual lease-by-lease basis, with no netting provisions. In addition,
Huntington continues to maintain insurance coverage that insures the full value
of the leased residuals. Accordingly, and in reliance on guidance furnished
by the Securities and Exchange Commission in its announcement at the Financial
Accounting Standards Board Emerging Issues Task Force meeting on May 15, 2003,
all leases covered under the New Policy, as amended, are now appropriately classified
as direct financing leases in the accompanying financial statements. As of December
31, 2002, $0.9 billion of such leases were included in loans and leases in the
Consolidated Balance Sheets. It is management's intention to insure the residuals
associated with future originations under the New Policy, as amended, and to
classify such new originations as direct financing leases.
The impact of this restatement also affected the Consolidated Income Statements.
Under the direct financing lease accounting method, interest income is recognized
on leases on a "level-yield" or interest method that ascribes a portion
of each lease payment to interest income, resulting in a constant rate of interest
over the life of the lease. The remaining portion of each payment amortizes
the net investment in the lease such that at the end of the lease term, the
net investment equals the residual value as determined at the inception of the
lease. Under operating lease accounting, lease payments are recorded as rental
income, a component of Operating lease income in the Non-interest income section
of the Consolidated Income Statements. Depreciation expense is recorded on a
straight-line basis over the term of the lease from the cost of the automobile
at the inception of the lease to the estimated residual value at the end of
the lease term. Depreciation expense is included in Operating lease expense
in the Non-interest expense section of the Consolidated Income Statement. Depreciation
expense is adjusted prospectively at any time during the lease term when the
estimated market value of the automobile at the end of the lease term changes.
Upon disposition, a gain, reflected in Non-interest income, or a loss, reflected
in Non-interest expense, is recorded for any difference between the net book
value of the lease and the proceeds from the disposition of the automobile.
Over the term of the lease, the cash flows, the timing of the cash flows,
and total income recognized are identical under either accounting method. One
significant difference between the two methodologies is the timing of income
recognition. Under operating lease accounting, less income is recognized in
the first half of the lease and more income is recognized in the second half
than under direct financing lease accounting.
Another significant difference between the direct financing lease method and
the operating lease method of accounting is the recognition of credit loss expense.
Credit losses occur when a lease is terminated early because the lessee fails
to make the required lease payments. These credit-generated terminations result
in Huntington taking possession of the automobile earlier than expected. When
this occurs, the market value of the automobile may be less than Huntington's
book value, resulting in a loss upon sale or write down to market value while
the vehicle is pending sale. Under the direct financing lease accounting method,
such losses are charged against an allowance for loan and lease losses that
is established at the inception of the lease and is adjusted periodically as
necessary through provision expense. Under operating lease accounting, the lease
is not treated like a loan, but as a depreciable non-interest earning asset.
Therefore, no allowance for loan and lease losses is established. As such, early
termination losses are recognized as a component of Operating lease expense
in the Non-interest expense section of the Consolidated Income Statements.
The fact that part of the auto lease portfolio is accounted for as operating
leases, with the remainder, including all future production, being accounted
for as direct financing leases, will impact the comparability of Huntington's
financial statements between reporting periods. As leases originated before
May 2002 accounted for as operating leases run off, and as new originations
are accounted for as direct financing leases, the level of operating lease income
and operating lease expense will decline over future reporting periods while
the level of interest income associated with direct financing leases will increase.
Additionally, management will increase the provision for loan and lease losses,
as appropriate, to provide the necessary level of reserves for new direct financing
lease originations. Balance sheet classifications will also be impacted as the
run off of the operating leases originated before the New Policy, as amended,
reduces non-interest earning assets while the new direct financing lease originations
covered under the New Policy, as amended, increase loans and leases.
AMENDMENT NO. 2
Huntington has voluntarily corrected and restated its earnings in this Amendment
No. 2 to its Annual Report on Form 10-K/A (Amendment No. 2) to correct for timing
errors in the recognition of certain revenues and expenses. Specifically, Amendment
No. 2 includes the following corrections:
o Huntington previously did not defer loan and lease origination fees and
certain expenses, but rather recognized the net amount in the period of origination.
This restatement applies, on a retroactive basis, deferral accounting for loan
and lease origination fees and costs. The impact of the restatement decreased
total loans and direct financing leases, operating lease assets, accrued expenses
and other liabilities, retained earnings, net interest income, operating lease
income, mortgage banking income, other non-interest income, personnel costs,
and other non-interest expense.
o Huntington previously amortized the loan referral fees paid to automobile
dealers (dealer premium) on a straight-line basis. As a result of this restatement,
Huntington is now amortizing these fees to interest income using methods that
closely approximate the results under the interest method. The impact of the
restatement reduced the amount of dealer premium included in automobile loans
and leases, reduced interest income on indirect loans and leases, and increased
gains on sales and securitizations of loans.
o Huntington previously deferred sales commissions paid to employees for the
origination of deposits and amortized these payments to interest expense over
the expected life of the deposit. In this restatement, Huntington is recognizing
the expense on these sales commissions when the deposits were originated and
commissions were earned. The impact of the restatement decreased the interest
expense on deposits, increased service charges on deposit accounts, and increased
personnel costs.
o Huntington offers its customers the ability to forego the payment of origination
fees at inception of a mortgage loan in exchange for a higher interest rate
over the life of the loan. Huntington had previously recorded origination fees
on such loans held for investment at inception. A loan premium was recognized
and amortized as a reduction of interest income on mortgage loans held for investment.
The impact of restatement reversed the loan premiums that were recognized as
mortgage banking income and increased the interest income recognized on mortgage
loans held for investment.
o Prior to 2002, Huntington recognized, in the year incurred, the expenses
or gains for pension settlements, which are actuarially determined expenses
or gains related to lump-sum benefit payments paid to individuals who voluntarily
or involuntarily retire earlier than their expected retirement date or to individuals
who voluntarily or involuntarily separate from Huntington. The expense for 2002
pension settlements was deferred to be recognized over a subsequent eight year
period. As part of the restatement, Huntington recognized this expense consistent
with years prior to 2002, which increased other liabilities and increased personnel
costs in the fourth quarter of 2002.
o Huntington previously recorded revenue from the sale of a contingent automobile
debt cancellation product by allocating a fixed portion of the proceeds from
each sale to revenue and reserves. The impact of the restatement increased the
amount of the reserve to cover claim losses on the products purchased by customers,
increased other liabilities, and increased other non-interest expenses.
o Huntington previously recorded tax consulting expenses as a component of
income tax expense. The impact of the restatement reclassified those expenses
to professional services and had no impact on net income.
o In 1998, Huntington entered into a sale-leaseback transaction. Huntington
recognized gains in 1998 and in 1999 as a reduction in occupancy expense above
the amounts that should have been recognized under a normal amortization schedule.
The impact of the restatement increased accrued expenses and other liabilities
and decreased retained earnings and occupancy expense.
o In 1998, Huntington marked to market the ineffective portion of an interest
rate swap associated with a fixed rate subordinated debt offering initiated
in 1992. The swap was subsequently sold in 2000. The restatement marks to market
the ineffective portion of the interest rate swap (i.e., the excess notional
amount of the swap) for all periods prior to 1998 and then annually through
2000. The restatement increased income prior to 1998, reduced income in 1998
and 1999, and increased income in 2000, but had no cumulative impact on retained
earnings.
o In 2001, Huntington negotiated a reduction in expenses on Bank Owned Life Insurance
which resulted in an increase in the cash surrender value of the policies at year
end 2001, but did not recognize the resulting income until 2002. The restatement
corrects the timing error by increasing income in 2001 and reducing income in
2002 by the same amount. There was no cumulative effect impact on retained earnings.
The following chart reflects the Amendment No. 2 impact on net income and
earnings per share as well as the cumulative effect on retained earnings:
Impact on Net Income
Cumulative --------------------------------------------------------------------------
Effect on Twelve Months Ended December 31,
Retained --------------------------------------------------------------------------
Earnings at 1997 &
(in thousands) Dec. 31, '02 2002 2001 2000 1999 1998 Prior
------------ --------- --------- --------- --------- --------- ---------
Deferral accounting for loan and
lease origination fees and costs $ (54,423) $ (5,467) $ (9,389) $ (12,148) $ (14,659) $ (2,788) $ (9,972)
Automobile loan referral fees (12,802) 1,300 -- 1,760 (2,380) (4,493) (8,989)
Commissions on deposit
account originations (9,856) 1,726 (1,582) (1,571) (2,709) (5,720) --
Mortgage loan origination fees (4,084) (2,490) (458) 905 (2,041) -- --
Pension settlements (2,193) (2,193) -- -- -- -- --
Debt cancellation
insurance reserves (7,700) (821) (2,506) (2,314) (963) (766) (330)
Tax consulting expenses -- -- -- -- -- -- --
Deferred gain on Sale/leaseback (9,644) 1,494 479 446 (6,350) (5,713) --
Interest rate swap -- -- -- 2,644 (2,644) (2,224) 2,224
Bank Owned Life Insurance -- (2,882) 2,882 -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Total $(100,702) $ (9,333) $ (10,574) $ (10,278) $ (31,746) $ (21,704) $ (17,067)
========= ========= ========= ========= ========= ========= =========
Impact on earnings per share:
Basic $ (0.03) $ (0.04) $ (0.04) $ (0.13) $ (0.08)
Diluted $ (0.03) $ (0.04) $ (0.04) $ (0.12) $ (0.08)
|
Further information regarding the impact of these restatements to Huntington's
results of operations and financial condition can be found in Notes 3 and 4
to the consolidated financial statements. Amendment No. 2 also provides additional
disclosures about the release of restructuring reserves established in 1998
and 2001 and about certain items of non-interest expense in the fourth quarter
of 2002.
CRITICAL ACCOUNTING POLICIES
Note 1 to the consolidated financial statements included in this report
lists significant accounting policies used in the development and presentation
of Huntington's financial statements. This discussion and analysis, the significant
accounting policies, and other financial statement disclosures identify and
address key variables and other qualitative and quantitative factors that are
necessary for an understanding and evaluation of the organization, its financial
position, results of operations, and cash flows.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States (GAAP) requires Huntington's management
to establish critical accounting policies and make accounting estimates, assumptions,
and judgments that affect amounts recorded and reported in its financial statements.
An accounting estimate requires assumptions about uncertain matters that could
have a material effect on the financial statements of Huntington if a different
amount within a range of estimates were used or if estimates changed from period
to period. Readers of this report should understand that estimates are made
under facts and circumstances at a point in time and changes in those facts
and circumstances could produce actual results that differ from when those estimates
were made. Huntington's management has identified the following as the most
significant accounting estimates and their related application:
o Estimated credit losses inherent in the loan portfolio for the establishment
of the allowance for loan losses, including estimated future contractual cash
flows of certain commercial and commercial real estate loans for evaluation
of impairment of loans,
o Estimated fair values of loan servicing rights and retained interests in
securitizations, including estimates of amounts and timing of future cash flows
of loans, cash flows for costs of servicing these loans, amounts and timing
of credit losses and prepayments of principal, and appropriate discount rate,
for the initial recognition of these assets, amount of amortization that is
recognized, and the assessment of these assets periodically for impairment,
o Estimated discount rate, the expected return on retirement plan assets,
the rate of compensation expense increase, and the health care cost trend rates
used in determining Huntington's projected benefit obligations, the fair value
of retirement and other plan assets, and the related benefit cost,
o Estimated fair values of Huntington's businesses that were used by management
periodically to assess goodwill and other intangibles for impairment, and
o Estimated fair value for all derivative financial instruments used to hedge
fair values or cash flows.
SPECIAL PURPOSE ENTITIES (SPEs)
Huntington established two securitization trusts, or SPEs, in 2000. These
two trusts had total assets of approximately $1.2 billion and $1.3 billion at
December 31, 2002 and 2001, respectively. In the securitization transactions,
indirect automobile loans that Huntington originated were sold to these trusts.
Under current GAAP, these trusts are not required to be consolidated in Huntington's
financial statements. As such, the loans and the debt within the trusts are
not included on Huntington's balance sheets at December 31, 2002 and 2001. See
Note 11 to the consolidated financial statements for more information regarding
securitized loans.
In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable
Interest Entities. This Interpretation of Accounting Research Bulletin No. 51
(ARB 51), Consolidated Financial Statements, addresses consolidation by business
enterprises where ownership interests in an entity may vary over time or, in
many cases, special-purpose entities (SPEs). To be consolidated for financial
reporting, these entities must have certain characteristics. ARB 51 requires
that an enterprise's consolidated financial statements include subsidiaries
in which the enterprise has a controlling financial interest. This Interpretation
requires existing unconsolidated variable interest entities to be consolidated
by their primary beneficiaries if the entities do not effectively disperse risks
among parties involved. An enterprise that holds significant variable interests
in such an entity, but is not the primary beneficiary, is required to disclose
certain information regarding its interests in that entity. This Interpretation
applies in the first fiscal year or interim period beginning after June 15,
2003, to variable interest entities in which an enterprise holds an interest
that it acquired before February 1, 2003. It also applies immediately to variable
interest entities created after January 31, 2003, and to variable interest entities
in which an enterprise obtains an interest after that date. This Interpretation
may be applied (1) prospectively with a cumulative-effect adjustment as of the
date on which it is first applied, or (2) by restating previously issued financial
statements for one or more years with a cumulative-effect adjustment as of the
beginning of the first year restated.
Huntington is reviewing the implications of Interpretation No. 46 and is considering
the adoption methods permitted. Management believes the only material impact
of adoption will be the consolidation of one of the securitization trusts formed
in 2000. The consolidation of that securitization trust will involve the recognition
of the trust's net assets, which, at December 31, 2002, included $1,017 million
of indirect automobile loans, $100 million of cash, and $1,000 million of secured
debt obligations with an interest rate based on commercial paper rates. In addition
to other adjustments and considerations, adoption will also eliminate the retained
interest in that securitization trust and its servicing asset related to the
loans in the trust, with carrying values at the end of 2002 of $152 million
and $12 million, respectively. The impact to Huntington's equity and results
of operations will depend on the method of transition adopted under this new
interpretation. Huntington will adopt this new standard effective with the beginning
of the third quarter of 2003.
DERIVATIVES AND OTHER OFF BALANCE SHEET ARRANGEMENTS
Huntington uses a variety of derivatives, principally interest rate swaps,
in its asset and liability management activities to mitigate the risk of adverse
interest rate movements on either cash flows or market value of certain assets
and liabilities.
Like other financial organizations, Huntington uses various commitments in
the ordinary course of business that, under GAAP, are not recorded in the financial
statements. Specifically, Huntington makes various commitments to extend credit
to customers, to sell loans, and to maintain obligations under operating-type
noncancelable leases for its facilities.
Derivatives are discussed under the "Interest Rate Risk Management"
section of this report and in Note 20 to the consolidated financial statements.
Information regarding commitments can be found in Note 23 to the consolidated
financial statements.
RELATED PARTY TRANSACTIONS
Various directors and executive officers of Huntington, and entities affiliated
with those directors and executive officers, are customers of Huntington's subsidiaries.
All such transactions with Huntington's directors and executive officers and
their affiliates are conducted in the ordinary course of business under normal
credit terms, including interest rate and collateralization, and do not represent
more than the normal risk of collection. At December 31, 2002 and 2001, the
total amount of their indebtedness to Huntington was $95.6 million and $133.8
million, respectively. A summary of the aggregate activity of this indebtedness
can be found in Note 10 to the consolidated financial statements. All other
related party transactions, including those reported in Huntington's 2003 Proxy
Statement and transactions subsequent to December 31, 2002, were considered
immaterial to its financial condition, results of operations, and cash flows.
COMMON SHARE REPURCHASE PROGRAMS
In February 2002, the Board of Directors authorized a share repurchase program
for up to 22 million shares and canceled the previously existing authorization.
Under this authorization, a total of 19.2 million shares were repurchased at
a cost of $370.0 million through the end of December 2002. An additional 0.2
million shares were repurchased in early January 2003, bringing total shares
repurchased under this authorization to 19.4 million shares. In mid-January
2003, the Board of Directors approved a new share repurchase authorization for
up to 8 million shares, canceling the 2.6 million shares remaining under the
February 2002 authorization. Huntington expects to use this new authorization
to complete the purchase of the 2.6 million shares remaining for repurchase
under the prior authorization. Repurchases of shares will be made from time
to time as deemed appropriate and will be reserved for reissue in connection
with Huntington's dividend reinvestment and employee benefit plans, as well
as for acquisitions and other corporate purposes.
SIGNIFICANT CREDIT ACTIONS
In the fourth quarter of 2002, Huntington initiated two credit actions associated
with commercial and commercial real estate loans. The first was the sale of
$47.2 million in non-performing assets with $21.4 million of related charge-offs.
The second action was the full charge-off of a $29.9 million credit exposure
to a single health care finance company. This credit was identified as a non-performing
loan and subsequently charged-off, all within the fourth quarter of 2002. These
credit actions had no earnings impact, as existing loss reserve levels were
sufficient to absorb the combined $51.3 million in charge-offs. As a result,
the allowance for loan and lease losses as a percentage of total loans and leases
at December 31, 2002, declined to 1.81% from 2.08% at September 30, 2002, and
the non-performing asset (NPA) coverage ratio (loan and lease loss reserve as
a percent of NPAs) improved to 246% from 173% at the end of the third quarter.
SUMMARY DISCUSSION OF RESULTS
Huntington reported net income of $323.7 million, or $1.33 per common share
(diluted), in 2002, compared with $134.8 million, or $0.54 per common share,
in 2001, and $322.4 million, or $1.29 per common share, in 2000. Return on average
common equity (ROE) and average assets (ROA) for 2002 were 14.6% and
1.25%, respectively, compared with 5.8% and 0.48%, respectively, in 2001, and
14.3% and 1.12%, respectively, in 2000. See Table 1 entitled Selected Financial
Data and Table 2 for Huntington's annual income statements for the recent five
years.
2002 VERSUS 2001 PERFORMANCE
The $188.9 million increase in earnings ($427.2 million pre-tax) related to
a combination of items that benefited 2002 performance versus 2001. These items
primarily related to the strategic restructuring announced in 2001 and included
pre-tax gains in 2002 of $182.5 million and $24.6 million associated with the
sale of the Florida banking operations and restructuring of Merchant Services,
respectively, $115.2 million pre-tax in additional provision for loan losses
in 2001, a $31.0 million pre-tax reduction in restructuring charges, and a $16.4
million pre-tax reduction in the net loss on results of operations from the
sold Florida banking and insurance operations. Results for 2001 reflected a
$32.5 million tax benefit related to the issuance of $400 million of REIT subsidiary
preferred stock, of which $50 million was sold to the public. Excluding the
impact of these items, as well as the net earnings impact from the sold Florida
banking and insurance operations from both 2002 and 2001, net income in 2002
would have been $279.7 million, up $32.7 million, or 13%, from the prior year
(See Table 25).
Net interest income on a fully taxable equivalent basis increased $33.1 million,
or 5%, reflecting a $1.1 billion, or 5%, decline in average earning assets more
than offset by a 33 basis point, or an effective 10%, increase in the net interest
margin to 3.62% from 3.29%. The decline in average earning assets reflected
a $0.7 billion, or 4%, decline in average loans and leases primarily due to
the sale of the Florida banking operations, as well as the planned run-off of
lower-margin investment securities and other earning assets. Excluding the impact
of the sold Florida banking operations from 2002 and 2001, net interest income
on a fully taxable equivalent basis increased $105.7 million, or 17%, reflecting
a $1.2 billion, or 6%, increase in average earning assets and a 33 basis point,
or an effective 10%, increase in the net interest margin to 3.63% from 3.30%.
The provision for loan and lease losses declined $62.9 million from 2001.
Excluding the $115.2 million of additional provision expense in 2001, as well
as the $9.9 million decline related to the sale of the Florida banking operations,
the provision for loan and lease losses increased $62.2 million, reflecting
loan and lease growth, as well as higher total commercial and commercial real
estate net charge-offs, as consumer net charge-offs declined. The higher total
commercial and commercial real estate net charge-offs reflected the impact of
the continued weak economy on some of Huntington's commercial customers, as
well as fourth quarter credit actions that accelerated the sale and disposition
of non-performing commercial loans.
Non-interest income was up $141.8 million, or 12%, reflecting a $182.5 million
gain from the sale of the Florida banking operations and $24.6 million gain
from the restructuring of Merchant Services. Excluding the impact of these gains
and the reduction of non-interest income due to the sold Florida banking and
insurance operations, non-interest income declined $6.9 million, or 1%. This
decrease was driven by a $34.7 million, or 5%, decrease in operating lease income
and a $19.1 million, or 37%, decline in mortgage banking income, which was partially
offset by a $15.8 million, or 12%, increase in service charges on deposit accounts
and smaller increases spread among the remaining fee income categories.
Non-interest expense was down $188.3 million, or 12%. Excluding the impact
from the $142.7 million decline in non-interest expense attributed to the sold
Florida banking and insurance operations, as well as the $31.0 million reduction
in restructuring charges, non-interest expense was down $14.7 million, or 1%.
This decrease largely reflected a $39.7 million, or 7%, decrease in operating
lease expense and a $10.2 million decline in amortization of intangible assets
expense as a result of the implementation of the new goodwill accounting rule,
FASB Statement No. 142, at the beginning of the year. These decreases were partially
offset by a $26.0 million, or 7%, increase in personnel costs, due to expansion
of management and employee talent at all levels, increased incentive-based pay,
and higher pension and benefits costs.
Huntington's efficiency ratio was 70.2% for 2002, an improvement from its
efficiency ratio for 2001 of 75.0%. Due to the accounting impact of its operating
leases, Huntington has an efficiency ratio that is higher than its peers. As
its operating lease assets run-off, Huntington's efficiency ratio should decline.
TABLE 2 - SELECTED ANNUAL INCOME STATEMENTS
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------
(in thousands of dollars, except per share amounts) 2002 2001 2000 1999 1998
----------- ----------- ----------- ----------- -----------
Total interest income $ 1,293,195 $ 1,654,789 $ 1,833,388 $ 1,795,214 $ 1,822,925
Total interest expense 543,621 939,501 1,163,278 982,370 990,146
----------- ----------- ----------- ----------- -----------
NET INTEREST INCOME 749,574 715,288 670,110 812,844 832,779
Provision for loan and lease losses 194,426 257,326 61,464 70,335 81,926
----------- ----------- ----------- ----------- -----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN AND LEASE LOSSES 555,148 457,962 608,646 742,509 750,853
----------- ----------- ----------- ----------- -----------
Operating lease income 657,074 691,733 623,835 489,971 376,274
Service charges on deposit accounts 153,564 165,012 161,426 156,783 126,403
Brokerage and insurance 66,843 79,034 61,871 52,076 36,710
Trust services 62,051 60,298 53,613 52,030 50,754
Mortgage banking 32,033 54,518 32,772 52,960 57,875
Bank owned life insurance 43,123 41,123 39,544 37,560 28,712
Other service charges and fees 42,888 48,217 43,883 37,301 29,202
Gain on sale of Florida operations 182,470 -- -- -- --
Merchant Services gain 24,550 -- -- -- --
Gains on sale of credit card portfolio -- -- -- 108,530 9,530
Securities gains 4,902 723 37,101 12,972 29,793
Other 72,206 59,284 69,157 54,675 74,834
----------- ----------- ----------- ----------- -----------
TOTAL NON-INTEREST INCOME 1,341,704 1,199,942 1,123,202 1,054,858 820,087
----------- ----------- ----------- ----------- -----------
Operating lease expense 518,970 558,626 494,800 346,027 273,287
Personnel costs 418,037 454,210 396,230 396,380 402,634
Equipment 68,323 80,560 78,069 66,666 62,040
Outside data processing and other services 67,368 69,692 62,011 62,886 74,795
Net occupancy 59,539 76,449 75,197 71,939 62,912
Marketing 27,911 31,057 34,884 32,506 32,260
Professional services 33,085 32,862 22,721 21,169 25,160
Telecommunications 22,661 27,984 26,225 28,519 29,429
Printing and supplies 15,198 18,367 19,634 20,227 23,673
Franchise and other taxes 9,456 9,729 11,077 14,674 22,103
Amortization of intangible assets 2,019 41,225 39,207 37,297 25,689
Restructuring charges 48,973 79,957 -- 46,791 90,000
Other 82,607 81,709 23,076 49,698 46,522
----------- ----------- ----------- ----------- -----------
TOTAL NON-INTEREST EXPENSE 1,374,147 1,562,427 1,283,131 1,194,779 1,170,504
----------- ----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES 522,705 95,477 448,717 602,588 400,436
Income taxes 198,974 (39,319)(1) 126,299 188,433 124,464
----------- ----------- ----------- ----------- -----------
NET INCOME $ 323,731 $ 134,796 $ 322,418 $ 414,155 $ 275,972
=========== =========== =========== =========== ===========
PER COMMON SHARE
Net Income
Basic $ 1.34 $ 0.54 $ 1.30 $ 1.63 $ 1.08
Diluted 1.33 0.54 1.29 1.62 1.07
Cash dividends declared 0.64 0.72 0.76 0.68 0.62
NET INTEREST INCOME - FULLY TAXABLE EQUIVALENT (FTE)
Net Interest Income $ 749,574 $ 715,288 $ 670,110 $ 812,844 $ 832,779
Tax Equivalent Adjustment(2) 5,205 6,352 8,310 9,423 10,307
----------- ----------- ----------- ----------- -----------
NET INTEREST INCOME - FTE $ 754,779 $ 721,640 $ 678,420 $ 822,267 $ 843,086
=========== =========== =========== =========== ===========
|
(1) Reflects a $32.5 million reduction related to the issuance of $400 million
of REIT subsidiary preferred stock, of which $50 million was sold to the public.
(2) Calculated assuming a 35% tax rate.
TABLE 3 - CONSOLIDATED AVERAGE BALANCE SHEETS AND
NET INTEREST MARGIN ANALYSIS
(in millions)
AVERAGE BALANCE
-------------------------------------------------------------
Fully Tax Equivalent Basis(1) 2002 2001 2000 1999 1998
--------- --------- --------- --------- ---------
ASSETS
Interest bearing deposits in banks $ 33 $ 7 $ 6 $ 9 $ 10
Trading account securities 7 25 15 13 11
Federal funds sold and securities purchased
under resale agreements 72 107 87 22 229
Mortgages held for sale 322 360 109 232 289
Securities:
Taxable 2,859 3,144 4,316 4,885 4,896
Tax exempt 135 174 273 297 247
--------- --------- --------- --------- ---------
Total Securities 2,994 3,318 4,589 5,182 5,143
--------- --------- --------- --------- ---------
Loans and Leases:
Commercial 5,679 6,650 6,450 6,133 5,634
Real Estate (3)
Construction 1,216 1,221 1,184 999 763
Commercial 2,378 2,340 2,186 2,234 2,303
Consumer
Automobile loans and leases 3,196 2,839 3,123 3,535 3,231
Home equity 3,085 3,398 2,990 2,345 1,942
Residential mortgage 1,438 1,048 1,379 1,488 1,364
Other loans 425 590 530 1,102 1,421
--------- --------- --------- --------- ---------
Total Consumer 8,144 7,875 8,022 8,470 7,958
--------- --------- --------- --------- ---------
Total Loans and Leases 17,417 18,086 17,842 17,836 16,658
--------- --------- --------- --------- ---------
Allowance for loan losses 374 307 274 280 264
--------- --------- --------- --------- ---------
Net Loans and Leases 17,043 17,779 17,568 17,556 16,394
--------- --------- --------- --------- ---------
Total earning assets 20,845 21,903 22,648 23,294 22,340
--------- --------- --------- --------- ---------
Operating lease inventory 2,602 2,970 2,751 2,179 1,745
Cash and due from banks 757 912 1,008 1,039 974
Intangible assets 293 736 709 682 487
All other assets 1,800 1,863 1,818 1,761 1,597
--------- --------- --------- --------- ---------
TOTAL ASSETS $ 25,923 $ 28,077 $ 28,660 $ 28,675 $ 26,879
========= ========= ========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Core deposits
Non-interest bearing deposits $ 2,902 $ 3,304 $ 3,421 $ 3,497 $ 3,287
Interest bearing demand deposits 5,161 5,005 4,291 4,097 3,585
Savings deposits 2,853 3,478 3,563 3,740 3,277
Other domestic time deposits 4,349 5,883 5,872 5,823 6,291
--------- --------- --------- --------- ---------
Total core deposits 15,265 17,670 17,147 17,157 16,440
--------- --------- --------- --------- ---------
Domestic time deposits of $100,000 or more 851 1,280 1,502 1,449 1,688
Brokered time deposits and negotiable CDs 731 128 502 238 182
Foreign time deposits 337 283 539 363 103
--------- --------- --------- --------- ---------
Total deposits 17,184 19,361 19,690 19,207 18,413
--------- --------- --------- --------- ---------
Short-term borrowings 2,128 2,325 1,966 2,549 2,085
Medium-term notes 1,865 2,024 2,894 3,122 2,902
Federal Home Loan Bank advances 279 19 13 5 53
Subordinated notes and other long-term debt,
including preferred capital securities 1,198 1,161 1,111 998 823
--------- --------- --------- --------- ---------
Total interest bearing liabilities 19,752 21,586 22,253 22,384 20,989
--------- --------- --------- --------- ---------
All other liabilities 1,053 859 734 667 531
Shareholders' equity 2,216 2,328 2,252 2,127 2,072
--------- --------- --------- --------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 25,923 $ 28,077 $ 28,660 $ 28,675 $ 26,879
========= ========= ========= ========= =========
NET INTEREST INCOME
Net interest rate spread
Impact of non-interest bearing funds on margin
NET INTEREST MARGIN
|
(1) Fully taxable equivalent yields are calculated assuming a 35% tax rate.
(2) Average rates computed using historical cost average balances and do not
give effect to changes in fair value of securities available for sale.
(3) Residential construction loans have been reclassified from Real estate
- Construction to Residential mortgage loans.
(4) Loan and lease and deposit average rates include the impact of applicable
derivatives.
Note: Individual loan and lease components include fees and cash basis interest
received on non-accrual loans.
INTEREST INCOME / EXPENSE
----------------------------------------------------------
Fully Tax Equivalent Basis(1) 2002 2001 2000 1999 1998
--------- --------- --------- --------- ---------
ASSETS
Interest bearing deposits in banks $ 0.8 $ 0.2 $ 0.3 $ 0.4 $ 1.0
Trading account securities 0.3 1.3 1.1 0.8 0.6
Federal funds sold and securities purchased
under resale agreements 1.1 4.5 5.5 1.2 12.9
Mortgages held for sale 20.5 25.0 8.7 16.3 20.2
Securities:
Taxable 173.0 206.9 269.5 297.0 308.8
Tax exempt 10.1 13.0 20.8 23.5 21.8
--------- --------- --------- --------- ---------
Total Securities 183.1 219.9 290.3 320.5 330.6
--------- --------- --------- --------- ---------
Loans and Leases:
Commercial 319.4 480.5 557.9 485.8 472.3
Real Estate (3)
Construction 57.1 86.4 106.0 84.4 69.2
Commercial 147.4 177.3 184.1 182.0 199.4
Consumer
Automobile loans and leases 261.1 255.0 270.9 291.2 287.1
Home equity 183.9 279.7 254.8 197.0 177.0
Residential mortgage 91.4 81.7 107.1 111.8 109.8
Other loans 32.3 49.6 54.9 113.3 153.1
--------- --------- --------- --------- ---------
Total Consumer 568.7 666.0 687.7 713.3 727.0
--------- --------- --------- --------- ---------
Total Loans and Leases 1,092.6 1,410.2 1,535.7 1,465.5 1,467.9
--------- --------- --------- --------- ---------
Total earning assets 1,298.4 1,661.1 1,841.6 1,804.7 1,833.2
--------- --------- --------- --------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Core deposits
Non-interest bearing deposits
Interest bearing demand deposits 89.5 134.0 143.5 106.3 96.4
Savings deposits 50.0 106.2 145.3 125.2 114.0
Other domestic time deposits 195.2 329.7 334.2 298.2 349.2
--------- --------- --------- --------- ---------
Total core deposits 334.7 569.9 623.0 529.7 559.6
--------- --------- --------- --------- ---------
Domestic time deposits of $100,000 or more 28.8 66.8 90.4 76.6 96.4
Brokered time deposits and negotiable CDs 17.3 6.6 31.9 12.8 10.5
Foreign time deposits 4.9 10.8 34.0 18.6 5.9
--------- --------- --------- --------- ---------
Total deposits 385.7 654.1 779.3 637.7 672.4
--------- --------- --------- --------- ---------
Short-term borrowings 42.7 95.8 113.1 114.3 97.7
Medium-term notes 61.7 121.7 189.3 170.1 164.6
Federal Home Loan Bank advances 5.6 1.2 0.8 0.3 2.9
Subordinated notes and other long-term debt,
including preferred capital securities 47.9 66.7 80.7 60.0 52.5
--------- --------- --------- --------- ---------
Total interest bearing liabilities 543.6 939.5 1,163.2 982.4 990.1
--------- --------- --------- --------- ---------
NET INTEREST INCOME $ 754.8 $ 721.6 $ 678.4 $ 822.3 $ 843.1
========= ========= ========= ========= =========
Net interest rate spread
Impact of non-interest bearing funds on margin
NET INTEREST MARGIN
AVERAGE RATE(2)(4)
-------------------------------------------------------------
Fully Tax Equivalent Basis (1) 2002 2001 2000 1999 1998
--------- --------- --------- --------- ---------
ASSETS
Interest bearing deposits in banks 2.38% 3.43% 5.03% 4.04% 10.16%
Trading account securities 4.11 5.13 7.11 5.89 5.71
Federal funds sold and securities purchased
under resale agreements 1.56 4.19 6.33 5.58 5.64
Mortgages held for sale 6.35 6.95 7.96 7.03 6.99
Securities:
Taxable 6.06 6.58 6.24 6.08 6.31
Tax exempt 7.42 7.49 7.61 7.90 8.83
--------- --------- --------- --------- ---------
Total Securities 6.12 6.63 6.33 6.18 6.43
--------- --------- --------- --------- ---------
Loans and Leases:
Commercial 5.62 7.22 8.65 7.92 8.38
Real Estate (3)
Construction 4.70 7.08 8.96 8.45 9.07
Commercial 6.20 7.58 8.42 8.15 8.65
Consumer
Automobile loans and leases 8.17 8.98 8.67 8.24 8.89
Home equity 5.96 8.23 8.52 8.40 9.11
Residential mortgage 6.36 7.79 7.77 7.51 8.05
Other loans 7.59 8.41 10.35 10.30 10.78
--------- --------- --------- --------- ---------
Total Consumer 6.98 8.46 8.57 8.42 9.14
--------- --------- --------- --------- ---------
Total Loans and Leases 6.27 7.80 8.61 8.22 8.81
--------- --------- --------- --------- ---------
Total earning assets 6.23% 7.58% 8.13% 7.75% 8.21%
--------- --------- --------- --------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Core deposits
Non-interest bearing deposits
Interest bearing demand deposits 1.73% 2.68% 3.34% 2.59% 2.69%
Savings deposits 1.75 3.05 4.08 3.35 3.48
Other domestic time deposits 4.49 5.60 5.69 5.12 5.55
--------- --------- --------- --------- ---------
Total core deposits 2.71 3.97 4.54 3.88 4.25
--------- --------- --------- --------- ---------
Domestic time deposits of $100,000 or more 3.39 5.22 6.01 5.28 5.71
Brokered time deposits and negotiable CDs 2.36 5.12 6.35 5.40 5.82
Foreign time deposits 1.47 3.82 6.31 5.14 5.66
--------- --------- --------- --------- ---------
Total deposits 2.70 4.07 4.79 4.06 4.45
--------- --------- --------- --------- ---------
Short-term borrowings 2.01 4.12 5.75 4.48 4.68
Medium-term notes 3.31 6.01 6.54 5.45 5.67
Federal Home Loan Bank advances 2.00 6.17 6.32 5.19 5.57
Subordinated notes and other long-term debt,
including preferred capital securities 4.00 5.75 7.27 6.02 6.38
--------- --------- --------- --------- ---------
Total interest bearing liabilities 2.75% 4.35% 5.23% 4.39% 4.72%
--------- --------- --------- --------- ---------
Net interest rate spread 3.48% 3.23% 2.90% 3.36% 3.49%
Impact of non-interest bearing funds on margin 0.14% 0.06% 0.10% 0.17% 0.28%
--------- --------- --------- --------- ---------
NET INTEREST MARGIN 3.62% 3.29% 3.00% 3.53% 3.77%
========= ========= ========= ========= =========
|
Diluted earnings per common share were $1.33 in 2002, up from $0.54 per common
share in 2001. After excluding the impact of Huntington's strategic restructuring
plan, as well as the results associated with the sold Florida banking and insurance
operations from both years, diluted earnings per share were $1.15 in 2002, up
$0.17, or 17%, from 2001. This reflected a 13% increase in net income on this
same basis, as well as the benefit of 3% fewer fully diluted shares outstanding.
In February 2002, the Board of Directors authorized a 22 million-share repurchase
program. During the year, 19.2 million shares were repurchased under this program,
which reduced average shares outstanding by 8.8 million for the year and contributed
$0.04 to earnings per share.
2001 VERSUS 2000 PERFORMANCE
The $187.6 million decrease in earnings ($353.2 million pre-tax) related to
a combination of items that negatively impacted 2001 performance. These items
primarily related to the strategic restructuring announced in 2001 and included
a $115.2 million pre-tax increase in the provision for loan and lease losses,
$80.0 million in restructuring charges, and a negative $22.1 million pre-tax
impact from the sold Florida banking and insurance operations, which went from
a $3.4 million positive pre-tax income impact in 2000 to a net loss of $18.7
million pre-tax in 2001. Results for 2001 also reflected a $32.5 million tax
benefit related to the issuance of $400 million of REIT subsidiary preferred
stock, of which $50 million was sold to the public. Excluding the impact of
these items from both 2001 and 2000, net income in 2001 was $246.6 million,
down $73.4 million, or 23% (See Table 25).
Net interest income on a fully taxable equivalent basis increased $43.2 million,
or 6%, reflecting a $0.7 billion, or 3%, decline in average earning assets which
was more than offset by a 29 basis point, or an effective 10%, increase in the
net interest margin to 3.29% from 3.00%. Average loans and leases increased
slightly between years, led by growth in home equity, commercial, and commercial
real estate loans and leases. However, this benefit was more than offset by
a 28% decline in average investment securities.
The provision for loan and lease losses increased $195.9 million reflecting
$115.2 million of provision expense including $65.2 million associated with
the strategic restructuring plan and a $50.0 million addition made in light
of the higher charge-offs and non-performing assets experience in the second
half of 2001 especially in the commercial and automobile loan portfolios. The
increase in non-performing assets, as well as higher commercial net charge-offs
reflected a weakening economy. The higher automobile loan charge-offs, primarily
reflected charge-offs associated with loan production from the fourth quarter
of 1999 through the fourth quarter of 2000, a period of time when Huntington
targeted a broader credit quality spectrum of borrowers.
Non-interest income increased $76.7 million, or 7%, driven by a $67.9 million
increase in operating lease income, a $21.7 million increase in mortgage banking
income, a $17.2 million increase in brokerage and insurance income and $6.7
million increase in trust services income. Also contributing to the growth in
non-interest income, but to a lesser degree, were increases in service charges
on deposits, and other service charges and fees, up $3.6 million and $4.3 million,
respectively. The benefit of these increases was partially offset by a $36.4
million decrease in securities gains as 2000 results included significant gains
related to the sales of marketable equity securities.
Non-interest expense increased $279.3 million, or 22%. This increase reflected
$80.0 million of restructuring charges, as well as a $63.8 million, or 13%,
increase in operating lease expense and a $58.0 million, or 15%, increase in
personnel costs driven by higher incentive-based pay. Other expense increased
$58.6 million, with $28.4 million of the change reflecting premium expense associated
with the purchase of automobile lease residual value insurance.
Diluted earnings per common share were $0.54 per common share in 2001, down
from $1.29 per share in 2000. After excluding the impact of Huntington's strategic
restructuring plan, as well as the results associated with the sold Florida
banking and insurance operations from both years, diluted earnings per share
were $0.98 in 2001, down $0.30 per share, or 23%, from 2000.
RESULTS OF OPERATIONS
NET INTEREST INCOME
Huntington's primary source of revenue is net interest income, which is the
difference between interest income on earning assets, primarily loans, direct
financing leases, and securities, and interest expense on funding sources, including
interest-bearing deposits and borrowings. Net interest income is impacted by
changes in the levels of interest rates, earning assets, and interest-bearing
liabilities. Changes in net interest income are measured through interest spread
and net interest margin. The difference between the yields on earning assets
and the rates paid for interest-bearing liabilities represents the interest
spread. The net interest margin is the calculated percentage of net interest
income to average earning assets. Both the interest spread and net interest
margin are presented on a fully taxable equivalent basis, which means that tax-free
interest income and dividend income, generated primarily from Huntington's investment
securities portfolio, are adjusted and expressed on the same basis as other
taxable income. Because non-interest bearing sources of funds, such as demand
deposits and stockholders' equity, also support earning assets, the net interest
margin exceeds the interest spread.
Table 3 shows the average annual balance sheets and the net interest margin
analysis for the recent five years (see Table 27 for this corresponding data
on an operating basis; i.e. excluding the impact of Huntington's strategic restructuring
plan, as well as the impact of the Florida banking operations sold in the first
quarter of 2002). Table 3 shows the average annual balances for total assets
and liabilities, as well as shareholders' equity, and their various components,
most notably loans and leases, deposits, and borrowings. It also shows the corresponding
interest income or interest expense associated with each earning asset and interest-bearing
liability category along with the average rate associated with each asset or
liability category, the difference resulting in the net interest spread. The
net interest spread plus the positive impact from non-interest bearing funds
represents the net interest margin.
Table 4 shows changes in fully taxable equivalent interest income, interest
expense, and net interest income due to volume and rate variances for major
categories of earning assets and interest-bearing liabilities. The change in
interest not solely due to changes in volume or rates has been allocated in
proportion to the absolute dollar amounts of the change in volume and rate.
TABLE 4 - CHANGE IN NET INTEREST INCOME DUE TO CHANGES IN AVERAGE VOLUME
AND INTEREST RATES
2002 2001
----------------------------------------- -----------------------------------------
INCREASE (DECREASE) FROM Increase (Decrease) From
PREVIOUS YEAR DUE TO: Previous Year Due To:
----------------------------------------- -----------------------------------------
Fully Taxable Equivalent Basis(1) YIELD/ Yield/
(in millions of dollars) VOLUME RATE TOTAL Volume Rate Total
----------- ----------- ----------- ----------- ----------- -----------
Loans and direct financing leases $ (50.5) $ (267.1) $ (317.6) $ 20.8 $ (146.3) $ (125.5)
Securities (20.9) (15.9) (36.8) (83.9) 13.5 (70.4)
Other earning assets (3.9) (4.4) (8.3) 19.3 (3.9) 15.4
----------- ----------- ----------- ----------- ----------- -----------
TOTAL EARNING ASSETS (75.3) (287.4) (362.7) (43.8) (136.7) (180.5)
----------- ----------- ----------- ----------- ----------- -----------
Deposits (89.6) (178.8) (268.4) (26.4) (98.8) (125.2)
Short- and medium-term borrowings (16.4) (96.7) (113.1) (34.9) (50.0) (84.9)
Long-term debt 7.9 (22.3) (14.4) 3.9 (17.5) (13.6)
----------- ----------- ----------- ----------- ----------- -----------
TOTAL INTEREST-BEARING LIABILITIES (98.1) (297.8) (395.9) (57.4) (166.3) (223.7)
----------- ----------- ----------- ----------- ----------- -----------
NET INTEREST INCOME $ 22.8 $ 10.4 $ 33.2 $ 13.6 $ 29.6 $ 43.2
=========== =========== =========== =========== =========== ===========
|
(1) Calculated assuming a 35% tax rate.
2002 VERSUS 2001 PERFORMANCE
Fully taxable equivalent net interest income was $754.8 million in 2002, up
$33.2 million, from 2001. This reflected a 5% decrease in average earning assets,
more than offset by a 33 basis point, or an effective 10%, increase in the net
interest margin to 3.62% from 3.29%.
The decrease in average earning assets reflected a $0.7 billion, or 4%, decline
in average loans and leases primarily due to the sale of the Florida banking
operations, as well as the planned run-off of lower-margin investment securities
and other earning assets. Changes in the balance sheet are discussed in more
detail below.
The 33 basis point increase in the net interest margin was influenced by two
factors. The first was the timing and magnitude of declining interest rates
in 2001 and 2002, and the fact that rates reached such historically low levels
during the second half of 2002. As interest rates declined in the second half
of 2001, deposit and wholesale funding costs declined more rapidly than yields
on earning assets, most notably loans and leases. As a result, the net interest
margin widened in the second half of 2001. However, as rates continued to decline
in 2002, especially in the second half, and given the absolute low levels attained,
it became increasingly difficult to lower deposit funding costs commensurate
with the decline in earning asset yields. As a result, yields on earning assets
fell more rapidly than deposit costs, thus narrowing the net interest margin
in the second half of 2002, particularly in the fourth quarter.
The second factor was a decision early in 2001 to reduce the level of low-return
investment securities. This helped drive the increase in the net interest margin
during the first three quarters of 2001.
A change in the loan and lease mix to lower yield, but higher credit quality,
loans and leases had the effect of mitigating the increase in the net interest
margin. Since the 2001 fourth quarter, consumer loan and lease production shifted
to higher credit quality automobile loan and lease production. Also mitigating
the net interest margin increase was the significant growth in lower-yield residential
mortgages. While this contributed to a reduced net interest spread on these
assets, it improved the total risk adjusted return as lower net charge-offs
should be experienced in future periods.
Reflecting these factors, during 2001 the net interest margin in the first
quarter was 3.19% and increased steadily throughout the year, peaking at
3.46% in the fourth quarter. During 2002, the margin peaked at 3.94% in the
second quarter and declined to 3.62% in the fourth quarter.
2001 VERSUS 2000 PERFORMANCE
Fully taxable equivalent net interest income was $721.6 million in 2001, up
$43.2 million, or 6%, from $678.4 million in 2000. This increase was driven
by a 29 basis point, or an effective 10%, increase in the net interest margin
to 3.29% from 3.00%, as average earning assets declined $0.7 billion, or 3%.
The decline in average earning assets between the two years was driven by
a $1.3 billion, or 28%, decrease in average investment securities as part of
the planned reduction in lower-margin earning assets. Average loans and leases
increased $0.2 billion, or 1%, reflecting a 3% increase in commercial loans,
with average commercial real estate loans up 6%. In contrast, average total
consumer loans and leases decreased 2%, despite a 14% increase in home equity
loans, as residential mortgages and automobile loans and leases declined 24%
and 9%, respectively. The higher net interest margin reflected a decision to
reduce the level of lower-margin residential mortgages and investment securities.
In addition, the balance sheet was slightly liability sensitive during the period
and benefited from the decline in short-term rates from 2000 to 2001.
IMPACT FROM DERIVATIVE FINANCIAL INSTRUMENTS
Huntington uses various types of derivative financial instruments, primarily
interest rate swaps, to manage its exposure to changes in interest rates. The
cash flows generated by derivative instruments are recorded along with the interest
income or expense from the hedged asset or liability and consequently are included
in the yields on those assets and liabilities. The impact of these derivatives
increased the net interest margin by 23 basis points in 2002 but lowered it
by 2 and 6 basis points in 2001 and 2000, respectively. Huntington's interest
rate risk position is discussed further in the "Interest Rate Risk Management"
section of this report.
BALANCE SHEET
Table 5 shows total loans and leases were $18.6 billion at December 31, 2002,
with 50% representing consumer loans and leases and 50% commercial and commercial
real estate loans.
TABLE 5 - END OF PERIOD LOAN AND LEASE PORTFOLIO COMPOSITION
AT DECEMBER 31, 2002 2001 2000 1999 1998
---------------- ---------------- ---------------- ---------------- ----------------
(in millions of dollars) AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT %
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Commercial loans (1) $ 5,608 30.2 $ 6,442 34.8 $ 6,638 37.7 $ 6,305 35.1 $ 6,032 34.3
Real estate
Construction 1,010 5.4 1,321 7.2 1,206 6.8 1,158 6.4 867 4.9
Commercial 2,719 14.6 2,496 13.5 2,252 12.8 2,150 11.9 2,231 12.7
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
TOTAL COMMERCIAL AND
COMMERCIAL REAL ESTATE
LOANS 9,337 50.2 10,259 55.5 10,096 57.3 9,613 53.4 9,130 51.9
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Consumer
Auto loans and leases 3,916 21.1 2,960 16.0 2,620 14.9 3,653 20.3 3,562 20.2
Home equity 3,198 17.2 3,580 19.4 3,203 18.2 2,561 14.2 2,173 12.3
Residential mortgage 1,740 9.4 1,124 6.1 1,057 6.0 1,520 8.4 1,458 8.3
Other loans 396 2.1 545 3.0 641 3.6 658 3.7 1,284 7.3
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
TOTAL CONSUMER LOANS 9,250 49.8 8,209 44.5 7,521 42.7 8,392 46.6 8,477 48.1
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
TOTAL LOANS AND LEASES $18,587 100.0 $18,468 100.0 $17,617 100.0 $18,005 100.0 $17,607 100.0
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
|
(1) There were no commercial loans outstanding that would be considered a
concentration of lending to a particular industry or group of industries.
For 2002, average total loans and leases were $17.4 billion, down $0.7 billion,
or 4%, from 2001, as shown on Table 3. Excluding the impact of the Florida related
loans sold from both 2002 and 2001, as shown on Table 27, average total loans
and leases were $17.1 billion, up $1.5 billion, or 10%, from the prior year, driven
by a $1.5 billion, or 23%, increase in consumer loans and leases. Since late 2001,
a key focus in loan growth has been the generation of residential mortgages and
home equity loans and lines of credit. This coincided with heavy demand for refinancing
mortgage assets due to the declining interest rate environment. As a result, average
residential mortgages increased $0.6 billion, or 74%, with home equity loans and
lines up $0.3 billion, or 11%. Average automobile loans and leases increased $0.7
billion, or 29%. Also contributing to growth in average loans and leases, on this
same basis, was a $0.4 billion, or 13%, increase in commercial real estate loans.
In contrast, average commercial loans declined $0.3 billion, or 5%, reflecting
a combination of low demand due to the weak economic environment and reduced shared
national credit exposure.
Average total loans and leases in 2001 were $18.1 billion, up $0.2 billion,
or 1%, from the prior year. Average commercial loans increased 3% with commercial
real estate loans up 6% from the prior year. Average total consumer loans were
little changed between years. While home equity loans and lines increased 14%,
this growth was offset by declines in automobile loans and leases and residential
mortgages of 9% and 24%, respectively.
Average operating lease assets were $2.6 billion in 2002, down 12% from the
prior year, in contrast to the 8% growth experienced in 2001. This reflected
the run-off of operating leases, as new automobile lease originations since
April 2002 are direct financing leases and reflected in automobile loans and
leases.
The $0.3 billion, or 10%, decline in average investment securities in 2002
reflected the continued run off of lower-margin earning assets, mostly in the
first half of 2001. The $1.3 billion, or 28%, decline to 2001 from 2000 in investment
securities reflected a decision to sell a significant portion of lower-margin
securities.
As shown in Table 13, deposits were $17.5 billion at December 31, 2002, with
87% representing core deposits, down from 93% at the end of the prior year,
which included the Florida deposits subsequently sold.
Average core deposits were $15.3 billion in 2002 as shown in Table 3. Excluding
the impact from average Florida deposits sold, as shown on Table 27, of $0.6
billion in 2002 and $4.3 billion in 2001, average core deposits in 2002 were
$14.7 billion, up $1.4 billion, or 10%, from the prior year and represented
89% of average total deposits. This growth was driven by a $1.3 billion, or
37%, increase in interest bearing demand deposits reflecting the combined benefits
of enhanced sales efforts and consumers moving funds out of the equity markets.
Average brokered time deposits and negotiable certificates of deposits increased
$0.6 billion reflecting management's strategy to further diversify its funding
sources.
On this same basis, average core deposits in 2001 were $13.3 billion, up 2%
from the prior year. This increase was driven by a 17% increase in average interest
bearing demand deposits reflecting successful campaigns to generate deposit
growth as well as fund inflows due to uncertainties in the equity markets.
Average borrowings in 2002, comprised of short- and medium-term notes, advances
from the Federal Home Loan Bank, and long-term debt including capital securities,
totaled $5.5 billion, little changed from the prior year. Average borrowings
in 2001 totaled $5.5 billion, down 8% from the year-earlier period. This reflected
a combination of factors including increased funding made available from the
planned balance sheet repositioning program which resulted in a decline in low-margin
earnings assets, particularly in the first half of the year, as well as deposit
growth in the second half of the year.
PROVISION FOR LOAN AND LEASE LOSSES
The provision for loan and lease losses is the expense necessary to maintain
the allowance for loan and lease losses (ALLL) at a level adequate to absorb
management's estimate of inherent losses in the loan and lease portfolio. The
provision expense was $194.4 million for 2002, down $62.9 million from $257.3
million in 2001. Excluding the $115.2 million of additional provisions in 2001,
as well as the $9.9 million decline related to the sale of the Florida banking
operations, the provision for loan and lease losses increased $62.2 million,
reflecting loan and lease growth, as well as higher total commercial and commercial
real estate net charge-offs, as consumer net charge-offs declined. Higher total
commercial and commercial real estate net charge-offs reflected the impact of
the continued weak economy on some of Huntington's commercial customers, as
well as fourth quarter credit actions that accelerated the sale and disposition
of non-performing commercial loans. Specific credit actions in the fourth quarter
2002 included $21.4 million in charge-offs associated with the sale of non-performing
assets and the charge-off of a $29.9 million credit exposure to a single health
care finance company. Existing loan and lease loss reserves were sufficient
to absorb these charges and, accordingly, there was no impact on 2002 provision
expense.
For 2001, the provision for loan and lease losses was $257.3 million, up $195.9
million from $61.5 million in 2000. Of this increase, $65.2 million reflected
a charge associated with Huntington's strategic refocusing plan discussed earlier.
These charges included estimated losses related to the exit of sub-prime automobile
and truck and equipment lending, losses related to delinquent consumer and small
business loans and leases more than 120 days past due, and increased reserves
for consumer bankruptcies. In addition, there was a $50.0 million increase to
the allowance for loan and lease losses made in light of the higher charge-offs
and non-performing assets experience in the second half of 2001 especially in
the commercial and automobile loan and lease portfolios. The increase in non-performing
assets, as well as higher commercial net charge-offs, reflected a weakening
economy. The higher automobile loan and lease charge-offs primarily reflected
charge-offs associated with loan and lease production from the fourth quarter
of 1999 through the fourth quarter of 2000, a period of time when Huntington
targeted a broader credit quality spectrum of borrowers. See the "Credit
Risk" section for discussion of the ALLL, net charge-offs, and non-performing
assets.
NON-INTEREST INCOME
Non-interest income for the recent three years ended December 31 was as follows:
TABLE 6 - NON-INTEREST INCOME
(in thousands of dollars) 2002 2001 2000
------------ ------------ ------------
Operating lease income $ 657,074 $ 691,733 $ 623,835
Service charges on deposit accounts 153,564 165,012 161,426
Brokerage and insurance 66,843 79,034 61,871
Trust services 62,051 60,298 53,613
Mortgage banking 32,033 54,518 32,772
Bank owned life insurance 43,123 41,123 39,544
Other services charges and fees 42,888 48,217 43,883
Gain on sale of Florida operations 182,470 -- --
Merchant Services gain 24,550 -- --
Securities gains 4,902 723 37,101
Other 72,206 59,284 69,157
------------ ------------ ------------
TOTAL NON-INTEREST INCOME $ 1,341,704 $ 1,199,942 $ 1,123,202
============ ============ ============
|
Non-interest income was $1,341.7 million, up $141.8 million, or 12%, reflecting
a $182.5 million gain from the sale of the Florida operations and a $24.6 million
gain from the restructuring of Merchant Services. Adjusted to exclude the impact
of these gains and the benefit of a $5.3 million reduction in securities losses,
partially offset by the $63.6 million reduction in non-interest income attributed
to the sold Florida banking and insurance operations, non-interest income was
down $6.9 million, or 1%. (See Tables 25 and 26 for further details).
The primary cause of this $6.9 million decrease was a $34.7 million, or 5%,
decrease in operating lease income due to run-off as new production since April
2002 is recorded as direct financing leases. Offsetting this decrease, deposit
service charges increased $15.8 million, or 12%, reflecting higher personal
and commercial service charges; brokerage and insurance income increased $5.5
million, or 10%, reflecting a 19% increase in combined mutual fund and annuity
sales; trust services increased $4.1 million, or 7%, due to a 12% increase in
mutual fund fees, as well as a 4% increase in personal trust income; and bank
owned life insurance was up $2.0 million. Huntington owns and is the beneficiary
on three Bank owned life insurance policies that were purchased in 1997 and
1998, insuring the lives of selected Huntington officers. Written consents were
obtained from the officers prior to the purchase of the policies. The policies
represented approximately 3% of total assets at December 31, 2002 and 2001.
The insurance providers are rated A+ or higher. Additionally, the cash values
of these policies are backed by assets that are maintained in a separate account
to protect Huntington from possible insolvency of the insurance providers.
Mortgage banking income excluding the impact of the sold Florida banking operations
declined $19.1 million, or 37%, due, in part, to $14.1 million of mortgage servicing
impairment in 2002 compared with $6.3 million of such impairment in 2001. These
impairments reflected a significant increase in prepayments due to heavy mortgage
refinancing activity, particularly in the second half of 2002. Total mortgage
loans originated in 2002 were a record $4.1 billion, up from $3.5 billion in
2001 due to heavy refinancing activity as borrowers took advantage of very low
interest rates. At December 31, 2002, the value of capitalized mortgage servicing
rights was 0.78% of loans serviced for others, down from 0.97% at the end of
the prior year.
Other service charges excluding the impact of the sold Florida banking and
insurance operations was up $4.4 million, or 12%, primarily driven by higher
check card and on-line bill payment fees. Other income on this same comparative
basis was up $16.2 million, or 29%, reflecting increases spread over a number
of miscellaneous fee and service income categories.
Non-interest income was $1,199.9 million in 2001, up $76.7 million, or 7%. Contributing
to this growth was a $67.9 million, or 11%, increase in operating lease income,
reflecting growth in the automobile leases outstanding, and a $21.7 million, or
66%, increase in mortgage banking income due to higher mortgage origination activity.
Total mortgage loan originations in 2001 were $3.5 billion, significantly higher
than $1.5 billion in 2000. This reflected an increase in refinancing activity
due to lower interest rates. Brokerage and insurance income increased $17.2 million,
or 28%, driven by strong growth in insurance and investment banking fees. Also
increasing were trust services, up 12%, other service charges and fees, up 10%,
and service charges on deposits, up 2%.
Securities gains in 2002 totaled $4.9 million, up $4.2 million from the prior
year, which included a $5.3 million loss realized from the sale of $15 million
of Pacific Gas & Electric commercial paper acquired from the Huntington
Money Market Fund. Securities gains in 2001 were $0.7 million, down $36.4 million
from 2000. Gains in 2000 included gross gains of $66.5 million from the sale
of certain equity investments substantially offset by losses from the sale of
lower yielding, fixed-income investment securities.
NON-INTEREST EXPENSE
Non-interest expense for the recent three years ended December 31 was as follows:
TABLE 7 - NON-INTEREST EXPENSE
(in thousands of dollars) 2002 2001 2000
------------ ------------ ------------
Operating lease expense $ 518,970 $ 558,626 $ 494,800
Personnel costs 418,037 454,210 396,230
Equipment 68,323 80,560 78,069
Outside data processing and other services 67,368 69,692 62,011
Net Occupancy 59,539 76,449 75,197
Marketing 27,911 31,057 34,884
Professional services 33,085 32,862 22,721
Telecommunications 22,661 27,984 26,225
Printing and supplies 15,198 18,367 19,634
Franchise and other taxes 9,456 9,729 11,077
Amortization of intangible assets 2,019 41,225 39,207
Restructuring charges 48,973 79,957 --
Other 82,607 81,709 23,076
------------ ------------ ------------
TOTAL NON-INTEREST EXPENSE $ 1,374,147 $ 1,562,427 $ 1,283,131
============ ============ ============
|
Non-interest expense in 2002 was $1,374.1 million, down $188.3 million, or
12%. Excluding the impact from the $142.7 million decline in non-interest expense
attributed to the sold Florida banking and insurance operations, as well as
the $31.0 million reduction in restructuring charges, non-interest expense was
down $14.7 million, or 1%, reflecting a decline in operating lease expense,
as well as lower amortization of intangibles and other expenses. These were
partially offset by higher personnel costs and outside data processing expenses.
(See Tables 25 and 26 for further details).
Operating lease expense declined $39.7 million, or 7%, reflecting the run-off
of operating leases as automobile lease originations since April 2002 are direct
financing leases in the automobile loans and leases category.
Personnel costs excluding the impact of the sold Florida banking and insurance
operations increased $26.0 million, or 7%, in 2002 reflecting higher salaries,
incentive-based compensation, and pension and benefit costs. Higher salaries
reflected the expansion of management and employee talent at all levels, including
the credit workout group. In addition, and given a renewed focus on sales, incentive-based
compensation increased throughout Huntington, most notably in mortgage banking
which had a record production year. Higher medical and pension costs were partially
offset by gains related to stock received from the demutualization of certain
insurance companies where Huntington owned related insurance policies. Outside
data processing and other services increased $6.7 million, or 11%, reflecting
volume-driven costs, mostly mortgage banking related. Professional services
expense increased $0.8 million, or 3%, due primarily to legal and other costs
associated with the resolution of problem credits. Marketing expense was up
$1.4 million, or 5%, reflecting expanded advertising activities.
Expense categories that declined from 2001, excluding the impact of the sold
Florida banking and insurance operations, included a $10.2 million decline in
the amortization of intangible assets, mostly goodwill due to the implementation
of FASB Statement No. 142, Goodwill and Other Intangible Assets at the beginning
of 2002. Equipment costs declined $3.7 million, or 5%, reflecting lower maintenance
costs. Net occupancy expense was down $1.4 million, or 2%, on this same comparative
basis due to a real estate tax credit in 2002.
Restructuring charges totaled $49.0 million in 2002 compared with $80.0 million
in 2001. The charges for 2002 and 2001 were related to the strategic restructuring
announced in July 2001.
Non-interest expense in 2001 was $1,562.4 million, up $279.3 million, or 22%.
Contributing to this increase was a $63.8 million, or 13%, increase in operating
lease expense, a $58.0 million, or 15%, increase in personnel costs, a $58.6
million increase in the other expense category, and $80.0 million in restructuring
charges. The increase in operating lease expense reflected a $63.3 million increase
in depreciation expense. Depreciation on leased automobiles increased in 2001
when compared with 2000 due to higher levels of leases, as well as the acceleration
of depreciation on vehicles where the expected proceeds at the end of the lease
will be less than the expected residual value. The higher personnel costs reflected
increased sales commissions related to mortgage banking, capital markets, and
annuity and mutual fund sales, offset by lower benefit expense. The $58.6 million
increase in other expense reflected the $28.4 million premium expense related
to the purchase of automobile lease residual value insurance, of which there
was none in 2000. See the "Credit Risk" section for more information
regarding automobile lease residual insurance.
INCOME TAXES
Income taxes were $199.0 million in 2002 compared with an income tax benefit
of $39.3 million in 2001 and income tax expense of $126.3 million in 2000. Tax
expense in each of these years was significantly impacted by the effect of the
strategic restructuring and related sale of the Florida banking and insurance
operations, the nature of the restructuring charges, and other items. Huntington's
effective tax rate was 38.1%, -41.2%, and 28.1% in 2002, 2001, and 2000, respectively.
Excluding the effect of the strategic restructuring and related sale of the
Florida banking and insurance operations, the nature of the restructuring charges
and other items, Huntington's effective tax rate was 23.8%, 21.6%, and 28.1%
in 2002, 2001, and 2000, respectively.
Huntington previously recorded tax consulting expenses as a component of income
tax expense. The impact of the restatement reclassified those expenses to professional
services and had no impact on net income. Tax consulting expense was $7.3 million
in 2002, $9.0 million in 2001, and $1.9 million in 2000. No tax consulting expenses
were recorded as a component of income tax expense prior to 2000.
Based on information currently available, Huntington expects its 2003 effective
tax rate to range from 26% to 28%. Subsequent to year-end 2002, the Internal
Revenue Service completed the audit of Huntington's consolidated federal income
tax returns through the tax year 2001. The tax audit resulted in no material
impact to Huntington's financial statements. See Note 24 to the consolidated
financial statements for more information regarding reported basis income taxes.
CREDIT RISK
Huntington's exposure to credit risk is managed through the use of consistent
underwriting standards that emphasize "in-market" lending while avoiding
highly leveraged transactions as well as excessive industry and other concentrations.
The credit administration function employs risk management techniques to ensure
that loans and leases adhere to corporate policy and problem loans and leases
are promptly identified. These procedures provide executive management with
the information necessary to implement policy adjustments where necessary, and
to take corrective actions on a proactive basis. Beginning in 2002, management
increased its emphasis on its commercial lending to customers with existing
or potential relationships within Huntington's primary markets. As a result,
outstanding shared national credits declined to $979 million at December 31,
2002, from $1.1 billion at the same period-end last year and a peak of $1.5
billion at June 30, 2001.
ALLOWANCE FOR LOAN AND LEASE LOSSES (ALLL)
The ALLL was $336.6 million at December 31, 2002, down from $369.3 million
at the end of 2001. This represented 1.81% of total loans and leases at year-end
2002 compared with 2.00% for 2001. At the end of 2002, the ALLL represented
246% of non-performing assets up significantly from 162% at the end of last
year. Given all of the characteristics in Huntington's loan and lease portfolio,
management believes the ALLL is sufficient to absorb the credit losses inherent
in the portfolio.
The following table shows the activity in Huntington's ALLL, along with selected
credit quality indicators.
TABLE 8 - SUMMARY OF ALLOWANCE FOR LOAN AND LEASE LOSSES AND RELATED
STATISTICS
(in thousands of dollars) 2002 2001 2000 1999 1998
--------- --------- --------- --------- ---------
BALANCE, BEGINNING OF YEAR $ 369,332 $ 264,929 $ 273,931 $ 273,125 $ 251,540
LOAN AND LEASE LOSSES
Commercial loans (128,868) (65,743) (18,013) (16,203) (24,512)
Real estate
Construction (4,863) (845) (238) (638) (80)
Commercial (15,012) (3,676) (1,522) (2,399) (2,115)
Consumer
Automobile loans and leases (59,010) (71,638) (47,687) (42,783) (39,107)
Home equity (15,312) (16,384) (7,979) (7,233) (6,215)
Residential mortgage (888) (879) (1,140) (1,404) (1,243)
Other consumer loans (10,399) (15,375) (9,246) (28,422) (39,328)
--------- --------- --------- --------- ---------
TOTAL LOAN AND LEASE LOSSES (234,352) (174,540) (85,825) (99,082) (112,600)
--------- --------- --------- --------- ---------
RECOVERIES OF PREVIOUSLY CHARGED OFF LOANS
AND LEASES
Commercial loans 11,106 6,175 4,201 5,303 4,546
Real estate
Construction 403 179 165 192 441
Commercial 1,831 613 268 1,260 1,800
Consumer
Automobile loans and leases 18,464 16,567 15,407 14,201 14,979
Home equity 1,806 1,796 1,070 1,137 685
Residential mortgage 16 94 133 268 367
Other consumer loans 3,814 2,847 2,934 7,192 7,399
--------- --------- --------- --------- ---------
TOTAL RECOVERIES 37,440 28,271 24,178 29,553 30,217
--------- --------- --------- --------- ---------
NET LOAN AND LEASE LOSSES (196,912) (146,269) (61,647) (69,529) (82,383)
--------- --------- --------- --------- ---------
Provision for loan and lease losses 194,426 257,326 61,464 70,335 81,926
Allowance for loans sold (22,297) -- -- -- --
Allowance of securitized loans (9,165) (6,654) (16,719) -- --
Allowance of loans and leases acquired 1,264 -- 7,900 -- 22,042
--------- --------- --------- --------- ---------
BALANCE, END OF YEAR $ 336,648 $ 369,332 $ 264,929 $ 273,931 $ 273,125
========= ========= ========= ========= =========
NET LOAN AND LEASE LOSSES AS A % OF AVERAGE
TOTAL LOANS AND LEASES 1.13% 0.81% 0.35% 0.39% 0.49%
ALLOWANCE FOR LOAN AND LEASE LOSSES AS A %
OF TOTAL END OF PERIOD LOANS AND LEASES 1.81% 2.00% 1.50% 1.52% 1.55%
|
Huntington allocates the ALLL to each loan and lease category based on an
expected loss ratio determined by continuous assessment of credit quality based
on portfolio risk characteristics and other relevant factors such as historical
performance, significant acquisitions and dispositions of loans, and internal
controls. For the commercial and commercial real estate credits, expected loss
factors are assigned by credit grade at the individual loan and lease level
at the time the loan or lease is originated. On a periodic basis, management
reevaluates these credit grades. The aggregation of these factors represents
management's estimate of the inherent loss in the portfolio.
The portion of the allowance allocated to the more homogeneous consumer loan
and lease segments is determined by expected loss ratios based on the risk characteristics
of the various segments and giving consideration to existing economic conditions
and trends. Expected loss ratios incorporate factors such as trends in past
due and non-accrual amounts, recent loan and lease loss experience, current
economic conditions, and risk characteristics of various loan and lease categories.
Actual loss ratios experienced in the future, could vary from those expected,
as performance is a function of factors unique to each customer as well as general
economic conditions.
To ensure adequacy to a higher degree of confidence, a portion of the ALLL
is considered unallocated. For analytical purposes, the allocation of the ALLL
is provided in Table 9. While amounts are allocated to various portfolio segments,
the total ALLL, excluding impairment reserves prescribed under provisions of
Statement of Financial Accounting Standard No. 114, is available to absorb losses
from any segment of the portfolio.
TABLE 9 - ALLOCATION OF ALLOWANCE FOR LOAN AND LEASE LOSSES
(in thousands of dollars) 2002 2001 2000 1999 1998
------------ ------------ ------------ ------------ ------------
Commercial loans $ 155,577 $ 174,713 $ 104,968 $ 94,978 $ 82,129
Real estate
Construction 12,542 17,685 12,596 14,863 10,729
Commercial 35,853 38,177 33,909 32,073 35,206
Consumer
Automobile loans and leases 51,621 38,799 28,877 40,043 40,792
Home equity 18,621 24,054 19,246 17,089 15,691
Residential mortgage 8,566 6,013 4,421 5,393 5,247
Other consumer loans 8,085 19,757 22,516 21,523 47,715
------------ ------------ ------------ ------------ ------------
Total allocated 290,865 319,198 226,533 225,962 237,509
Total unallocated 45,783 50,134 38,396 47,969 35,616
------------ ------------ ------------ ------------ ------------
TOTAL ALLOWANCE FOR LOAN AND LEASE LOSSES $ 336,648 $ 369,332 $ 264,929 $ 273,931 $ 273,125
============ ============ ============ ============ ============
|
NET CHARGE-OFFS
Total net charge-offs as a percent of average total loans and leases were
1.13% in 2002 compared to 0.81% in 2001. The increase was due largely to $51.3
million in commercial loan charge-offs related to the special credit actions
in the fourth quarter of 2002. In 2001, Huntington made the decision to exit
the sub-prime automobile and truck and equipment lending business, which had
a combined balance of $69.7 million at December 31, 2002, down from $144.3 million
at the end of 2001. Excluding net charge-offs related to these exited businesses,
total net charge-offs in 2002 and 2001 were 1.08% and 0.73%, respectively. Commercial
and commercial real estate net charge-offs, spread over a number of companies
in the retail trade, manufacturing, services, and communications sectors, were
1.46% in the current year versus 0.55% in 2001. Excluding the net charge-offs
related to the fourth quarter 2002 special credit actions, total net charge-offs
and total commercial and commercial real estate net charge-offs for 2002 were
0.84% and 0.90%, respectively. Consumer charge-offs were 0.65% in 2002 compared
with 0.98% in 2001. Automobile loan and lease net charge-offs were 1.06% in
2002 compared with 1.96% in 2001. Table 10 shows the amount of net charge-offs
by loan and lease type as a percentage of average loans and leases.
TABLE 10 - NET LOAN AND LEASE CHARGE-OFFS
(in thousands of dollars) 2002 2001 2000 1999 1998
------------ ------------ ------------ ------------ ------------
NET CHARGE-OFFS BY TYPE
Commercial loans $ 117,528 $ 52,000 $ 13,812 $ 10,900 $ 19,966
Commercial real estate 17,641 3,729 1,327 1,585 (46)
------------ ------------ ------------ ------------ ------------
TOTAL COMMERCIAL AND COMMERCIAL REAL ESTATE 135,169 55,729 15,139 12,485 19,920
------------ ------------ ------------ ------------ ------------
Consumer
Automobile loans and leases 33,027 52,479 32,280 28,582 24,128
Home equity 13,506 14,588 6,909 6,096 5,530
Residential mortgage 872 785 1,007 1,136 876
Other consumer loans 4,524 7,778 6,312 21,230 31,929
------------ ------------ ------------ ------------ ------------
TOTAL CONSUMER 51,929 75,630 46,508 57,044 62,463
------------ ------------ ------------ ------------ ------------
Total net charge-offs, excluding exited businesses 187,098 131,359 61,647 69,529 82,383
Net charge-offs related to exited businesses 9,814 14,910 -- -- --
------------ ------------ ------------ ------------ ------------
TOTAL NET CHARGE-OFFS $ 196,912 $ 146,269 $ 61,647 $ 69,529 $ 82,383
============ ============ ============ ============ ============
|
TABLE 10 - NET LOAN AND LEASE CHARGE-OFFS (CONTINUED)
(in thousands of dollars) 2002 2001 2000 1999 1998
------------ ------------ ------------ ------------ ------------
NET CHARGE-OFFS AS A % OF AVERAGE
LOANS AND LEASES
Commercial loans 2.07% 0.78% 0.21% 0.18% 0.35%
Commercial real estate 0.49% 0.10% 0.04% 0.05% --
------------ ------------ ------------ ------------ ------------
TOTAL COMMERCIAL AND
COMMERCIAL REAL ESTATE 1.46% 0.55% 0.15% 0.13% 0.23%
------------ ------------ ------------ ------------ ------------
Consumer
Automobile loans and leases 1.06% 1.96% 1.03% 0.81% 0.75%
Home equity 0.44% 0.43% 0.23% 0.26% 0.28%
Residential mortgage 0.06% 0.07% 0.07% 0.08% 0.06%
Other consumer loans 1.09% 1.37% 1.19% 1.93% 2.25%
------------ ------------ ------------ ------------ ------------
TOTAL CONSUMER 0.65% 0.98% 0.58% 0.67% 0.78%
------------ ------------ ------------ ------------ ------------
Total net charge-offs, excluding exited
businesses 1.08% 0.73% 0.35% 0.39% 0.49%
============ ============ ============ ============ ============
TOTAL NET CHARGE-OFFS 1.13% 0.81% 0.35% 0.39% 0.49%
============ ============ ============ ============ ============
|
Economic activity has remained sluggish and the uncertainty about the future
level of activity has increased recently. Management expects 2003 full year
net charge-offs to be in the 0.65%-0.75% range.
NON-PERFORMING ASSETS
Non-performing assets consist of loans and leases that are no longer accruing
interest, loans and leases that have been renegotiated to below market rates
based upon financial difficulties of the borrower, and real estate acquired
through foreclosure. Commercial and commercial real estate loans are generally
placed on non-accrual status when collection of principal or interest is in
doubt or when the loan is 90 days past due. When interest accruals are suspended,
accrued interest income is reversed with current year accruals charged to earnings
and prior year amounts generally charged off as a credit loss. Consumer loans
and leases, excluding residential mortgages, are not placed on non-accrual status
but are charged off in accordance with regulatory statutes, which is generally
no more than 120 days past due. Residential mortgages, while highly secured,
are placed on non-accrual status within 180 days past due as to principal and
210 days past due as to interest, regardless of security. A charge-off on a
residential mortgage loan is recorded when the loan has been foreclosed and
the loan balance exceeds the fair value of the real estate. The fair value of
the collateral is then recorded as real estate owned. When, in management's
judgment, the borrower's ability to make periodic interest and principal payments
resumes and collectibility is no longer in doubt, the loan is returned to accrual
status.
Total NPAs were $136.7 million at December 31, 2002, compared with $227.5
million at the end of 2001 and represented 0.74% and 1.23% of total loans and
leases and other real estate. The decline in the level of NPAs from the prior
year-end reflected the sale of NPAs in the fourth quarter of 2002. While the
economy has continued to be weak and the uncertainty about the future level
of economic activity has increased, management continues to expect NPAs in 2003
to remain around current levels.
TABLE 11 - NON-PERFORMING ASSETS AND PAST DUE
LOANS AND LEASES
DECEMBER 31,
-----------------------------------------------------------------------
(in thousands of dollars) 2002 2001 2000 1999 1998
----------- ----------- ----------- ----------- -----------
Non-accrual loans and leases
Commercial loans $ 91,861 $ 159,637 $ 55,804 $ 42,958 $ 34,586
Real estate
Construction 5,554 13,885 8,687 10,785 10,181
Commercial 21,211 34,475 18,015 16,131 13,243
Residential 9,443 11,836 10,174 11,866 14,419
----------- ----------- ----------- ----------- -----------
Total non-accrual loans and leases 128,069 219,833 92,680 81,740 72,429
Renegotiated loans -- 1,276 1,304 1,330 4,706
----------- ----------- ----------- ----------- -----------
TOTAL NON-PERFORMING LOANS AND LEASES 128,069 221,109 93,984 83,070 77,135
----------- ----------- ----------- ----------- -----------
Other real estate, net 8,654 6,384 11,413 15,171 18,964
----------- ----------- ----------- ----------- -----------
TOTAL NON-PERFORMING ASSETS $ 136,723 $ 227,493 $ 105,397 $ 98,241 $ 96,099
=========== =========== =========== =========== ===========
ACCRUING LOANS AND LEASES PAST DUE 90 DAYS OR MORE $ 61,526 $ 76,013 $ 66,665 $ 54,567 $ 47,789
=========== =========== =========== =========== ===========
NON-PERFORMING LOANS AND LEASES AS A % OF TOTAL LOANS
AND LEASES 0.69% 1.20% 0.53% 0.46% 0.44%
NON-PERFORMING ASSETS AS A % OF TOTAL LOANS AND LEASES
AND OTHER REAL ESTATE 0.74% 1.23% 0.60% 0.55% 0.55%
ALLOWANCE FOR LOAN LOSSES AS A % OF NON-PERFORMING LOANS
AND LEASES 263% 167% 282% 330% 354%
ALLOWANCE FOR LOAN AND LEASE LOSSES AS A% OF
NON-PERFORMING ASSETS 246% 162% 251% 279% 284%
ACCRUING LOANS AND LEASES PAST DUE 90 DAYS OR MORE
TO TOTAL LOANS AND LEASES 0.33% 0.41% 0.38% 0.30% 0.27%
|
Note: For 2002, the amount of interest income which would have been recorded
under the original terms for total loans and leases classified as non-accrual
or renegotiated was $12.6 million. Amounts actually collected and recorded as
interest income for these loans and leases was $5.1 million.
Loans and leases past due ninety days or more but continuing to accrue interest
decreased to $61.5 million at December 31, 2002, down from $76.0 million a year
earlier. This represented 0.33% and 0.41% of total loans and leases, respectively.
Table 12 reflects the change in NPAs for the recent four years and includes
NPAs in the Florida operations to the date of their sale in the 2002 first quarter:
TABLE 12 - NON-PERFORMING ASSET ACTIVITY
(in thousands) 2002 2001 2000 1999
------------ ------------ ------------ ------------
Beginning of Period $ 227,493 $ 105,397 $ 98,241 $ 96,099
New non-performing assets 260,229 329,882 113,870 106,014
Returns to accruing status (17,124) (2,767) (5,914) (5,744)
Loan and lease losses (152,616) (67,541) (18,052) (19,547)
Payments (136,774) (106,839) (68,982) (67,682)
Sales (44,485)(1) (30,639) (13,766) (10,899)
------------ ------------ ------------ ------------
End of Period $ 136,723 $ 227,493 $ 105,397 $ 98,241
============ ============ ============ ============
|
(1) Includes $6.5 million related to the sale of the Florida operations and
$21.4 million related to the 4th quarter special credit actions.
INTEREST RATE RISK MANAGEMENT
Huntington seeks to minimize earnings volatility by managing the sensitivity
of net interest income and the fair value of its net assets to changes in market
interest rates. The Board of Directors and the Asset and Liability Management
Committee (ALCO) oversee various risks by establishing broad policies and specific
operating limits that govern a variety of risks inherent in operations, including
liquidity, counterparty credit risk, settlement, and market risks.
Market risk is the potential for declines in the fair value of financial instruments
due to changes in interest rates, exchange rates, and equity prices. Interest
rate risk is Huntington's primary market risk. It results from timing differences
in the repricing and maturity of assets and liabilities and changes in relationships
between market interest rates and the yields on assets and rates on liabilities,
including the impact of embedded options.
Interest rate risk management is a dynamic process that encompasses new business
flows onto the balance sheet, wholesale investment and funding, and the changing
market and business environment. Effective management of interest rate risk
begins with appropriately diversified investments and funding sources. To accomplish
overall balance sheet objectives, management regularly accesses money, bond,
futures, and options markets, as well as trading exchanges. In addition, Huntington
contracts with dealers in over-the-counter financial instruments for interest
rate swaps. ALCO regularly monitors position concentrations and the level of
interest rate sensitivity to ensure compliance with approved risk tolerances.
Interest rate risk modeling is performed monthly. An income simulation model
is used to measure the sensitivity of forecasted net interest income to changes
in market rates over a one-year horizon. Although Bank Owned Life Insurance
and automobile operating lease assets are classified as non-interest earning
assets, Huntington includes these portfolios in its interest sensitivity analysis
because both have attributes similar to fixed-rate interest earning assets.
Market value risk (referred to as Economic Value of Equity, or EVE) is measured
using a static balance sheet. The models used for these measurements take into
account prepayment speeds on mortgage loans, mortgage-backed securities, and
consumer installment loans, as well as cash flows of other loans and deposits.
Balance sheet growth assumptions are also considered in the income simulation
model. Moreover, the models incorporate the effects of embedded options, such
as interest rate caps, floors, and call options, and account for changes in
relationships among interest rates.
The baseline scenario for the income simulation, with which all others are
compared, is based on market interest rates implied by the prevailing yield
curve. Alternative market rate scenarios are then employed to determine their
impact on the baseline scenario. These alternative market rate scenarios include
spot rates remaining unchanged for the entire measurement period, parallel rate
shifts on both a gradual and immediate basis, as well as movements in rates
that alter the shape of the yield curve. Scenarios are also developed to measure
basis risk, such as the impact of LIBOR-based rates rising or falling faster
than the prime rate.
When evaluating short-term interest rate risk exposure, management uses, for
its primary measurement, scenarios that model 200 basis point increasing and
decreasing parallel shifts in the yield curve during the next twelve-month period.
At December 31, 2002, only the 200 basis point increasing parallel shift in
the yield curve was modeled because a 200 basis point decrease in the interest
rate curve was not feasible given the overall low level of interest rates. At
the end of 2002, that scenario modeled net interest income to be approximately
0.7% lower than the internal forecast of net interest income over the same time
period using the current level of forward rates. This compares with the Board
of Directors policy limit of a 4.0% change in net interest income given a 200
basis point scenario. Management believes further declines in market rates would
put modest downward pressure on net interest income, resulting from the implicit
pricing floors in non-maturity deposits.
The net interest margin has been adversely impacted in recent months by: (1)
fixed-rate consumer loan repayments being reinvested at lower market rates;
(2) high repayments of residential mortgage loans and mortgage-backed securities;
(3) the implicit floors in retail deposits as rates declined to historically
low levels; (4) the rapid growth of lower-yielding residential adjustable-rate
mortgage loans retained on the balance sheet; (5) the lower yield on the higher
quality automobile loan originations; and (6) the flattening of the yield curve.
Future net interest income could be adversely affected by these factors.
The primary measurement for EVE risk assumes an immediate and parallel increase
in rates of 200 basis points. At December 31, 2002, the model indicated that
such an increase in rates would be expected to reduce the EVE by approximately
3.8% and compares with an estimated negative impact of approximately 2.9% at
December 31, 2001.
The model is a useful but simplified representation of Huntington's underlying
interest rate risk profile. Simulations reflect choices of statistical techniques,
functional forms, model parameters, and numerous uncertain assumptions. Nonetheless,
experience has demonstrated and management believes that these models provide
reliable guidance for measuring and managing interest rate sensitivity.
LIQUIDITY
Liquidity is the ability to meet cash flow needs on a timely basis at a reasonable
cost. The liquidity of the Bank is used to make loans and leases and to repay
deposit liabilities as they become due or are demanded by customers. Huntington's
ALCO establishes guidelines and regularly monitors the overall liquidity position
of the Bank and the parent company to ensure that various alternative strategies
exist to cover unanticipated events that could affect liquidity. Management
believes that sufficient liquidity exists at both the parent company and the
Bank to meet their estimated needs.
BANK LIQUIDITY
The Bank manages both its external and internal liquidity. External liquidity
includes maintaining funding sources for the Bank's activities. These activities
primarily consist of making loans and leases to customers, repaying the Bank's
obligations as they become due, and supporting the cost of operating the Bank.
Selected information regarding the Bank's short-term borrowings is found in
Table 14 and the maturity of obligations, including payments due under operating
lease obligations, is reflected in Table 15.
Deposits are the Bank's primary source of funding, of which 87% were provided
by the Regional Banking segment. Table 13 details the types and sources of deposits
by business segment at December 31, 2002, and compares these balances by type
and source to balances at December 31, 2001.
TABLE 13 - DEPOSIT LIABILITIES
DECEMBER 31, 2002 December 31, 2001
(in millions of dollars) ----------------------------- -----------------------------
BY TYPE BALANCE % Balance %
------------- ------------- ------------- -------------
Demand deposits
Non-interest bearing $ 3,074 17.6 $ 3,635 18.0
Interest bearing 5,374 30.7 5,723 28.3
Savings deposits 2,851 16.3 3,466 17.2
Other domestic time deposits 3,956 22.6 5,868 29.1
------------- ------------- ------------- -------------
TOTAL CORE DEPOSITS 15,255 87.2 18,692 92.6
------------- ------------- ------------- -------------
Domestic time deposits of $100,000 or more 732 4.2 1,131 5.6
Brokered time deposits and negotiable CDs 1,093 6.2 138 0.7
Foreign time deposits 419 2.4 226 1.1
------------- ------------- ------------- -------------
TOTAL DEPOSITS $ 17,499 100.0 $ 20,187 100.0
============= ============= ============= =============
BY BUSINESS SEGMENT
Regional Banking
Central Ohio / West Virginia $ 5,361 30.6 $ 5,217 25.8
Northern Ohio 3,602 20.6 3,256 16.1
Southern Ohio / Kentucky 1,365 7.8 1,291 6.4
West Michigan 2,402 13.7 2,227 11.0
East Michigan 1,962 11.2 1,895 9.4
Indiana 613 3.5 578 2.9
------------- ------------- ------------- -------------
Total Regional Banking 15,305 87.4 14,464 71.6
------------- ------------- ------------- -------------
Dealer Sales 59 0.3 82 0.4
Private Financial Group 924 5.3 717 3.6
Treasury / Other 1,211 7.0 256 1.3
------------- ------------- ------------- -------------
TOTAL DEPOSITS EXCLUDING FLORIDA 17,499 100.0 15,519 76.9
------------- ------------- ------------- -------------
Florida -- -- 4,668 23.1
------------- ------------- ------------- -------------
TOTAL DEPOSITS $ 17,499 100.0 $ 20,187 100.0
============= ============= ============= =============
|
Domestic time deposits of $100,000 or more, adjusted to include brokered time
deposits and negotiable certificates of deposit and IRAs included in Other domestic
time deposits, totaled $1.9 billion at December 31, 2002. These time deposits
mature as follows: $343 million within three months, $182 million within six
but more than three months, $212 million within one year but more than six months,
and $1,166 million maturing beyond one year. At December 31, 2002, Huntington's
loans and leases were 106% of total deposits. This compares with 91% of total
deposits at December 31, 2001, or 102% excluding the loans and deposits sold
with the Florida operations.
The Bank's ALCO establishes policies and monitors guidelines to diversify the
Bank's wholesale funding sources to avoid concentrations in any one market source.
Wholesale funding sources include Federal funds purchased, securities sold under
repurchase agreements, non-core deposits, and medium- and long-term debt. To enhance
the availability of liquidity, the Bank has available a $6.0 billion domestic
bank note program. This program was renewed in 2002. At December 31, 2002, a total
of $5.7 billion in domestic bank notes remained available for future issuance
under this program. In addition, the Bank shares a $2.0 billion Euronote program
with the parent company. This program was renewed on February 6, 2003, and is
subject to annual renewal. Approximately $1.3 billion was available under this
program at December 31, 2002. Both programs enable the Bank to issue notes with
maturities from one month to thirty years. During 2002, management added significantly
to its wholesale borrowings, primarily due to the loss of deposit funding with
the sale of Huntington's Florida banking operations. In adding wholesale borrowings,
management also lengthened the average maturity of these borrowings. At the end
of 2002, the Bank had wholesale borrowings of $5.9 billion, which had a weighted-average
maturity of 1.7 years.
TABLE 14 - SHORT-TERM BORROWINGS
YEAR ENDED DECEMBER 31,
--------------------------------------------
(in thousands of dollars) 2002 2001 2000
------------ ------------ ------------
FEDERAL FUNDS PURCHASED AND REPURCHASE AGREEMENTS
Balance at year-end $ 2,458,523 $ 1,913,607 $ 1,822,480
Weighted average interest rate at year-end 1.49% 2.24% 5.91%
Maximum amount outstanding at month-end during the year $ 2,503,962 $ 3,094,647 $ 2,093,546
Average amount outstanding during the year $ 2,072,075 $ 2,258,860 $ 1,831,228
Weighted average interest rate during the year 1.98% 4.11% 5.68%
|
The Bank is also a member of the Federal Home Loan Bank of Cincinnati (FHLB),
which provides funding through advances to its members that are collateralized
with mortgage-related assets. These advances carry maturities from one month
to twenty years. At December 31, 2002, the Bank had $1.0 billion of advances
from the FHLB, compared with only $17 million of advances at December 31, 2001.
During 2002, the Bank significantly increased its borrowing capability with
the FHLB as these advances provided a flexible source of funding. At December
31, 2002, a total of $2.7 billion of residential mortgage loans, commercial
real estate loans, and home equity loans were pledged to secure borrowing under
these advances.
TABLE 15 - MATURITY OF BANK OBLIGATIONS
PAYMENTS DUE BY PERIOD
---------------------------------------------------------------------------------
2008 &
(in millions of dollars) 2003 2004 2005 2006 2007 AFTER TOTAL
--------- --------- --------- --------- --------- --------- ---------
Medium-term notes $ 540.1 $ 855.0 $ 510.0 $ -- $ -- $ -- $ 1,905.1
Subordinated notes 253.0 -- -- -- -- 485.7 738.7
Preferred securities -- -- -- -- -- 50.0 50.0
Federal Home Loan Bank advances 10.0 3.0 100.0 -- 900.0 -- 1,013.0
Operating lease obligations 35.1 33.1 29.7 27.6 26.2 218.6 370.3
--------- --------- --------- --------- --------- --------- ---------
TOTAL $ 838.2 $ 891.1 $ 639.7 $ 27.6 $ 926.2 $ 754.3 $ 4,077.1
========= ========= ========= ========= ========= ========= =========
|
Huntington maintains a portfolio of securities that can be used as a secondary
source of liquidity (to the extent that securities are not pledged), substantially
all of which is held by the Bank. At December 31, 2002, the portfolio of securities
available for sale totaled $3.4 billion, of which $2.6 billion was pledged to
secure public and trust deposits, trading account liabilities, U.S. Treasury
demand notes, and securities sold under repurchase agreements. The composition
and maturity of these securities are presented in Table 16. Weighted average
yields were calculated using amortized cost and on a fully taxable equivalent
basis assuming a 35% tax rate, excluding marketable equity securities.
TABLE 16 - SECURITIES AVAILABLE FOR SALE
DECEMBER 31,
--------------------------------------------
(in thousands of dollars) 2002 2001 2000
------------ ------------ ------------
U.S. Treasury and Federal Agencies $ 2,627,684 $ 2,322,079 $ 3,284,031
Other 775,685 527,500 806,494
------------ ------------ ------------
TOTAL SECURITIES AVAILABLE FOR SALE $ 3,403,369 $ 2,849,579 $ 4,090,525
============ ============ ============
|
AMORTIZED FAIR
COST VALUE YIELD
----------- ----------- -----------
U.S. Treasury
1-5 years $ 13,434 $ 14,066 3.51%
6-10 years 4,704 5,367 5.51%
Over 10 years 412 479 6.07%
----------- ----------- -----------
Total U.S. Treasury 18,550 19,912 4.07%
----------- ----------- -----------
Federal Agencies
Mortgage-backed
1-5 years 48,618 50,428 5.54%
6-10 years 356,082 363,596 5.18%
Over 10 years 1,350,737 1,385,233 5.68%
----------- ----------- -----------
Total Mortgage-backed 1,755,437 1,799,257 5.58%
----------- ----------- -----------
Other agencies
Under 1 year 34,923 35,966 4.91%
1-5 years 743,609 768,271 5.21%
6-10 years 3,755 4,278 5.91%
----------- ----------- -----------
Total Other 782,287 808,515 5.20%
----------- ----------- -----------
TOTAL U.S. TREASURY AND FEDERAL AGENCIES 2,556,274 2,627,684 5.44%
----------- ----------- -----------
Other
Under 1 year 7,133 7,183 8.43%
1-5 years 62,939 63,886 6.53%
6-10 years 49,581 51,046 6.61%
Over 10 years 451,108 449,958 5.71%
Retained interest in securitizations 146,160 159,978 15.56%
Marketable equity securities 42,846 43,634
----------- ----------- -----------
TOTAL OTHER 759,767 775,685 7.88%
----------- ----------- -----------
TOTAL SECURITIES AVAILABLE FOR SALE $ 3,316,041 $ 3,403,369 5.98%
=========== =========== ===========
|
Other significant factors impacting the Bank's liquidity are the repayment
of principal and the receipt of interest on the Bank's loans and direct financing
leases, rental income payments from operating lease assets, and proceeds from
the sales of vehicles at the end of the applicable operating lease. The Bank's
consumer loan and lease portfolio contains a significant amount of loans and
leases with relatively shorter weighted-average lives to maturity. In addition,
commercial loans and real estate construction portfolios have relatively short
maturities with 44% of the combined principal maturing in one year or less,
as reflected in Table 17.
TABLE 17 - MATURITY SCHEDULE OF SELECTED LOANS
(in millions of dollars) AT DECEMBER 31, 2002
------------------------------------------------------------
One Year One to After
or Less Five Years Five Years Total
------------ ------------ ------------ ------------
Commercial loans $ 2,491 $ 2,482 $ 635 $ 5,608
Real estate - construction 449 543 18 1,010
------------ ------------ ------------ ------------
TOTAL $ 2,940 $ 3,025 $ 653 $ 6,618
============ ============ ============ ============
Variable interest rates $ 2,813 $ 2,582 $ 509 $ 5,904
Fixed interest rates 127 443 144 714
------------ ------------ ------------ ------------
TOTAL $ 2,940 $ 3,025 $ 653 $ 6,618
============ ============ ============ ============
|
There are other sources of liquidity should they be needed. These sources include
the sale or securitization of loans, the ability to acquire additional national
market, non-core deposits, additional collateralized borrowings such as FHLB advances,
the issuance of debt securities, and the issuance of preferred or common securities
in public or private transactions. The Bank also can borrow through the Federal
Reserve's discount window. At December 31, 2002, a total of $1.5 billion of commercial
loans had been pledged to secure potential future borrowings that could be obtained
through this facility.
PARENT COMPANY LIQUIDITY
Parent company liquidity consists primarily of a program of regular dividends
from its subsidiaries, predominantly the Bank, its medium-term note program,
and a commercial paper program issued through Huntington Bancshares Financial
Corporation, a non-bank subsidiary. The Bank could declare dividends to be paid
to the parent company, without regulatory approval, of $29.8 million at December
31, 2002.
The parent company uses this liquidity to pay dividends to its stockholders,
repurchase shares of its common stock, meet its financial obligations, fund
certain non-bank activities, finance acquisitions, and for other general corporate
purposes. At December 31, 2002, the parent company had $455 million issued under
a $750 million medium-term note program, leaving $295 million available for
future funding needs. At December 31, 2002, the parent company had $140 million
in medium-term notes outstanding: $40 million will mature in 2003 and $100 million
in 2004. As mentioned earlier, the parent company shares a $2.0 billion Euronote
program with the Bank. Availability of funding through these two programs amounted
to $1.6 billion at December 31, 2002.
In 2002, the liquidity of the parent company was favorably affected by the
sale of the Florida banking operations through a subsequent recapitalization
of the Bank. This recapitalization returned $670 million of capital to the parent
company. During 2002, subsequent to the recapitalization, the parent company
repurchased 19.2 million shares of its common stock for $370 million. Details
of this program are discussed further under the Capital section that follows.
At December 31, 2002, the parent company had $546.9 million of cash and cash
equivalents on hand. Management believes that the parent company has sufficient
liquidity to meet its cash flow obligations in 2003, including payment of its
current dividend, without relying upon the capital markets for financing.
CAPITAL
Capital is managed at each legal subsidiary based upon the respective risks
and growth opportunities, as well as regulatory requirements. Management places
significant emphasis on the maintenance of a strong capital position, which
promotes investor confidence, provides access to the national markets under
favorable terms, and enhances business growth and acquisition opportunities.
The importance of managing capital is also recognized and management continually
strives to maintain an appropriate balance between capital adequacy and returns
to shareholders.
Shareholders' equity declined $152 million during 2002 compared with an increase
of $7 million in the previous year. Increases to shareholders' equity reflecting
higher net earnings, equity issued for acquisitions, and the positive mark-to-market
of securities available for sale and derivatives used to hedge cash flows for
2002, were more than offset by repurchases of common shares and dividends. Cash
dividends declared were $0.64 per share in 2002, down from $0.72 per share in
2001 and $0.76 per share in 2000.
Average shareholders' equity in 2002 was $2.2 billion, down modestly from
$2.3 billion in 2001. The ratio of average equity to average assets in 2002
was 8.55% versus 8.29% a year ago. Tangible period-end equity to tangible period-end
assets was 7.24% at the end of 2002, up significantly from 5.87% a year earlier,
reflecting the tangible capital generated from the sale of the Florida operations
offset by the subsequent share repurchase program in 2002. Given the current
asset mix and risk profile, management has a longer term targeted tangible equity
to asset ratio of 7.00%.
In February 2002, the Board of Directors authorized a share repurchase program
for up to 22 million shares and canceled the previously existing authorization.
Under this authorization, a total of 19.2 million shares were repurchased at
a cost of $370.0 million through the end of December 2002. An additional 0.2
million shares were repurchased in early January 2003, bringing total shares
repurchased under this authorization to 19.4 million shares. In mid-January
2003, the Board of Directors approved a new share repurchase authorization for
up to 8 million shares, canceling the 2.6 million shares remaining under the
February 2002 authorization. Huntington expects to use this new authorization
to complete the purchase of the 2.6 million shares remaining for repurchase
under the prior authorization. Repurchases of shares will be made from time
to time as deemed appropriate and will be reserved for reissue in connection
with Huntington's dividend reinvestment and employee benefit plans, as well
as for acquisitions and other corporate purposes.
Risk-based capital guidelines established by the Federal Reserve Board set minimum
capital requirements and require institutions to calculate risk-based capital
ratios by assigning risk weightings to assets and off-balance sheet items, such
as interest rate swaps, loan commitments, and securitizations. Huntington's Tier
1 risk-based capital ratio, total risk-based capital ratio, leverage ratio, and
risk-adjusted assets for the recent five years are shown in Table 18:
TABLE 18 - CAPITAL ADEQUACY
"WELL- AT DECEMBER 31,
CAPITALIZED" ----------------------------------------------------------------------
(in millions of dollars) MINIMUMS 2002 2001 2000 1999 1998
------------ ---------- ---------- ---------- ---------- ----------
Total Risk-Adjusted Assets N/A $ 27,030 $ 27,736 $ 26,757 $ 25,187 $ 24,177
Ratios:
Tier 1 Risk-Based Capital 6.00% 8.34% 7.02% 7.13% 7.46% 7.05%
Total Risk-Based Capital 10.00% 11.25% 10.07% 10.29% 10.57% 10.62%
Tier 1 Leverage 5.00% 8.51% 7.16% 6.85% 6.64% 6.31%
|
Huntington is supervised and regulated by the Federal Reserve whereas the
Bank is primarily supervised and regulated by the Office of the Comptroller
of the Currency, which establishes similar regulatory capital guidelines for
banks. The Bank had regulatory capital ratios in excess of regulatory minimums.
During 2002, Huntington acquired Haberer Investment Advisor, Inc. (Haberer),
a Cincinnati-based registered investment advisory firm with approximately $500
million in assets under management. Huntington paid cash to Haberer shareholders
and issued 202,695 shares of common stock from treasury. Also during 2002, Huntington
acquired LeaseNet Group, Inc. (LeaseNet), a $90 million leasing company located
in Dublin, Ohio. Huntington paid cash to LeaseNet shareholders and issued 835,035
shares of common stock from treasury. See Huntington's Statement of Changes
in Shareholders' Equity on page 66 for a detail of activity.
LINES OF BUSINESS DISCUSSION
Below is a brief description of each line of business and a discussion of
business segment results. Regional Banking, Dealer Sales, and the Private Financial
Group are the major business lines. The fourth segment includes the impact of
the Treasury function and other unallocated assets, liabilities, revenue, and
expense. Financial information for each line of business, including a reconciliation
to reported earnings, can also be found in Note 28 to the consolidated financial
statements. The chief decision-makers for Huntington rely on operating basis
earnings for review of performance and for critical decision-making purposes
and, therefore, the information below is presented on an operating basis. During
2002, the previously reported segments, Retail Banking and Corporate Banking,
were combined and renamed Regional Banking. In addition, changes were made in
2002 to the methodologies utilized for certain balance sheet and income statement
allocations from Huntington's management reporting system. The prior periods
have not been restated for these methodology changes. The following tables within
each segment show performance on this basis for the most recent three years.
REGIONAL BANKING
Regional Banking provides products and services to retail, business banking,
and commercial customers. This segment's products include home equity loans,
first mortgage loans, direct installment loans, business loans, personal and
business deposit products, as well as sales of investment and insurance services.
These products and services are offered in six operating regions within the
five states of Ohio, Michigan, Indiana, West Virginia, and Kentucky through
Huntington's traditional banking network, Direct Bank--Huntington's customer
service center, and Web Bank at www.huntington.com. Regional Banking also represents
middle-market and large commercial banking relationships which use a variety
of banking products and services including, but not limited to, commercial loans,
international trade, and cash management.
TABLE 19 - REGIONAL BANKING RESULTS
YEAR ENDED DECEMBER 31,
--------------------------------------------
(in thousands of dollars) 2002 2001 2000
------------ ------------ ------------
Net interest income $ 573,456 $ 596,884 $ 625,500
Provision for loan and lease losses 141,190 96,943 36,180
Non-interest income 263,824 257,801 271,096
Non-interest expense 525,162 490,943 537,331
------------ ------------ ------------
Income before taxes 170,928 266,799 323,085
Income taxes 59,825 93,380 111,438
------------ ------------ ------------
OPERATING EARNINGS $ 111,103 $ 173,419 $ 211,647
============ ============ ============
|
Regional Banking's operating earnings were $111.1 million in 2002 compared
to $173.4 million for 2001 and $211.6 million for 2000. Net interest income
decreased $23.4 million, or 4%, in 2002. Regional Banking provides net funds
to Huntington's other business segments since its deposits exceed its loans
and leases and, therefore, receives an earnings credit for those excess deposits.
The declining interest rate environment resulted in lower credit for this deposit
excess and margin compression in 2002.
The provision for loan and lease losses increased $44.2 million in 2002 over
2001 versus an increase of $60.8 million in 2001 over 2000. The increases in
2002 and 2001 were indicative of the deteriorating credit quality that began
late in 2000. Provision expense reflects net charge-offs (excluding the restructuring
charges for 2001) and charges for loan and lease growth for the period. In 2002,
net charge-offs were 0.76% compared with 0.54% for 2001.
Non-interest income rose $6.0 million, or 2%, in 2002, following a $13.3 million,
or 5%, decline in 2001. Service charges on deposit accounts increased 12% (personal
9% and corporate 14%) to $144.7 million. The growth in personal service charges
was primarily attributable to a new pricing structure and deposit volume initiatives.
The corporate increase was the result of customers choosing to pay fees in lieu
of maintaining balances due to lower earnings credit paid to commercial checking
customers. In addition, electronic banking fees increased 10%. These revenue
increases were partially offset by a 12% decline in total mortgage banking income.
Gross mortgage banking revenue increased commensurate with a 22% increase in
closed loans, but significant impairment of mortgage servicing rights pushed
total mortgage banking income down in 2002. The declining rate environment during
the recent twelve months caused accelerated mortgage prepayment expectations
and, therefore, recognition of asset impairment of capitalized mortgage servicing
rights and increased amortization. Excluding mortgage banking income, non-interest
income increased 11% in 2002.
Non-interest expense was $525.2 million in 2002, up $34.2 million, or 7%,
when compared to $490.9 million in 2001. Non-interest expense for 2001 was down
$46.4 million, or 9%, from 2000. Personnel costs were $206.8 million, up 8%,
compared with $190.7 million in 2001. The increase reflected investment in strengthening
Regional Banking's management, business banking sales, and credit administration
teams. In addition, this segment experienced increases in performance-based
incentive compensation commensurate with production and revenue growth.
Total Regional Banking average loans and leases for 2002 increased to $12.3
billion, or 6%, over 2001. Mortgage and home equity lending represented the
majority of the growth in average earning assets. Average mortgage loans increased
46% from $815 million in 2001 to nearly $1.2 billion in 2002. Home equity loans
and lines of credit increased 19% from $1.8 billion in 2001 to $2.2 billion
in 2002. Commercial real estate loans for 2002 grew $213.6 million, or 7%, while
average commercial loans were down $373.1 million, or 8%, from 2001.
Total average deposits for 2002 increased $1.1 billion, or 8%, from 2001.
An enhanced focus on relationship selling and the economic environment propelled
growth in checking and money market deposits. While demand for retail CD's remained
strong, Regional Banking protected interest margins by refraining from paying
aggressive competitive rates resulting in a 2% decline in CD balances year-over-year.
Average deposit growth excluding CD's was 15% in 2002. As noted in the PFG line
of business review that follows, Regional Banking also experienced growth in
its packaged investment product sales through the retail channel.
Regional Banking contributed 40% of operating earnings in 2002 and comprised
68% of Huntington's total loan and lease portfolio and 87% of total deposits
at December 31, 2002.
DEALER SALES
Dealer Sales serves automotive dealerships within Huntington's primary banking
markets, as well as in Arizona, Florida, Georgia, Pennsylvania, and Tennessee.
This segment finances the purchase of automobiles by customers of the automotive
dealerships, purchases automobiles from dealers and simultaneously leases the
automobile under long-term operating and direct financing leases, finances the
dealership's inventory of automobiles, and provides other banking services to
the automotive dealerships and their owners.
TABLE 20 - DEALER SALES RESULTS
YEAR ENDED DECEMBER 31,
---------------------------------------------
(in thousands of dollars) 2002 2001 2000
------------ ------------ ------------
Net interest income $ 6,782 $ (30,728) $ (49,821)
Provision for loan and lease losses 44,573 29,655 17,098
Non-interest income 687,061 712,444 656,262
Non-interest expense 609,257 637,979 523,387
------------ ------------ ------------
Income before taxes 40,013 14,082 65,956
Income taxes 14,001 4,928 22,965
------------ ------------ ------------
OPERATING EARNINGS $ 26,012 $ 9,154 $ 42,991
============ ============ ============
|
Dealer Sales operating earnings were $26.0 million in 2002, compared to $9.2
million in 2001 and $43.0 million in 2000. Higher provision for loan and lease
losses and losses on terminated operating leases, reflecting weakened economic
conditions, higher bankruptcies, and a softer used car market, had an adverse
impact on operating performance of this segment in 2002 and 2001. Since April
2002, Huntington began booking leases for automobiles as direct financing leases
instead of operating leases.
Net interest income was $6.8 million for 2002, compared with a negative $30.7
million for 2001. Net interest income was a negative $49.8 million for 2000.
Net interest income was negative for 2001 and 2000 because the funding cost
related to Dealer Sales' operating lease assets, which are non-interest earning
assets, is included in interest expense, whereas the revenue is reported as
a component of non-interest income. The change in net interest income is primarily
from recording automobile leases as direct financing leases rather than operating
leases as had been Huntington's practice prior to May 2002. Automobile loan
balances increased $188.7 million to $3.0 billion during 2002 from $2.9 billion
in 2001. Direct financing lease balances increased $767 million to $874 million
in 2002, while operating lease inventory balances decreased $368 million to
$2.6 billion. Total automobile loan and lease (direct financing and operating)
originations were $3.5 billion in 2002 compared with $3.4 billion in 2001.
The provision for loan and lease losses for 2002 increased $14.9 million from
2001 compared with an increase in 2001 of $12.6 million. The increase in provision
expense is from the creation of additional allowance for losses on loans and
leases as required by direct financing lease accounting.
Non-interest income decreased $25.4 million, or 4%, from 2001, reflecting
lower operating lease rental income. Non-interest expense decreased $28.7 million,
reflecting lower depreciation expense on lower operating lease inventory balances.
Dealer Sales contributed 10% and 37% of 2002 operating earnings and operating
revenues, respectively.
PRIVATE FINANCIAL GROUP (PFG)
PFG provides products and services designed to meet the needs of Huntington's
higher wealth customers. Revenue is derived through the sale of personal trust,
asset management, investment advisory, brokerage, insurance, and deposit and
loan products and services. Income and related expenses from the sale of brokerage
and insurance products is shared with the line of business that generated the
sale or provided the customer referral.
TABLE 21 - PRIVATE FINANCIAL GROUP RESULTS
YEAR ENDED DECEMBER 31,
--------------------------------------------
(in thousands of dollars) 2002 2001 2000
------------ ------------ ------------
Net interest income $ 35,403 $ 36,323 $ 30,502
Provision for loan and lease losses 3,477 408 1,279
Non-interest income 108,817 91,986 57,442
Non-interest expense 100,961 94,025 53,866
------------ ------------ ------------
Income before taxes 39,782 33,876 32,799
Income taxes 13,924 11,857 11,343
------------ ------------ ------------
OPERATING EARNINGS $ 25,858 $ 22,019 $ 21,456
============ ============ ============
|
PFG's operating earnings for 2002 were $25.9 million, up 17% from 2001, due
primarily to growth in non-interest income. For 2002, growth in non-interest
income was partially offset by reduced net interest income, increased provision
for loan and lease losses, and increased non-interest expense. Operating earnings
were $21.5 million for 2000.
Average loans and leases grew 36% to $895 million and average deposits grew
30% to $807 million from 2001 to 2002. Net interest income was down 3% driven
by a shift in product mix and margin compression, particularly on consumer loans
and leases reflective of lower consumer mortgage loan rates.
Provision for loan and lease losses for 2002 increased by $3.1 million from
2001 largely reflecting higher net charge-offs. Net charge-offs were 0.20% of
average loans and leases for 2002 versus 0.09% for 2001.
Non-interest income for 2002 was $108.8 million, up 18% from 2001, resulting
primarily from increased brokerage revenue, increased trust revenue, and increased
other income. Brokerage revenue increased by $7.3 million, or 23%, from 2001
due to increased sales of annuity products. Insurance revenue for 2002 decreased
by $0.4 million, or 3%, from 2001 mostly due to decreased sales volume from
the life agency business.
In 2002, PFG restructured its sales/distribution force to eliminate the use
of separate insurance sales personnel to sell insurance products through the
retail branch offices and to utilize the more established brokerage sales force
for retail insurance sales. Although sales volume decreased during this transition
year as the new model was being implemented, significant expense savings resulted
as well. Trust revenue for 2002 increased by $4.0 million, or 7%, from 2001
largely due to the acquisition of Haberer in April 2002. Increased revenue from
investment advisory and other services provided to the Huntington Funds was
also a major source of the increase in trust revenue. During 2001, PFG introduced
five new equity funds. These funds grew to over $200 million in assets by the
end of 2002. Other income for 2002 increased by $5.6 million from 2001 primarily
because of the $4.2 million charge in 2001 for the impairment loss related to
the Pacific Gas & Electric commercial paper held by the Huntington Money
Market Fund.
Non-interest expense for 2002 increased $6.9 million, or 7%, from 2001 driven
by the Haberer operating expenses combined with increased sales commissions
and salary expense. Sales commissions increased $1.7 million as a result of
the increase in non-interest income.
PFG contributed 9% of operating earnings in 2002 and 8% of total revenues
in 2002.
TREASURY / OTHER
The Treasury / Other segment includes assets, liabilities, equity, revenue,
and expense that are not directly assigned or allocated to one of the lines
of business. Since a match-funded transfer pricing system is used to allocate
interest income and interest expense to other business segments, Treasury /
Other results include the net impact of any over or under allocations arising
from centralized management of interest rate risk including the net impact of
derivatives used to hedge interest rate sensitivity. Furthermore, this segment's
results include the net impact of administering Huntington's investment securities
portfolio as part of overall liquidity management. Additionally, amortization
expense of intangible assets and gains or losses not allocated to other business
segments are also a component.
TABLE 22 - TREASURY / OTHER RESULTS
YEAR ENDED DECEMBER 31,
----------------------------------------------
(in thousands of dollars) 2002 2001 2000
------------ ------------ ------------
Net interest income $ 124,209 $ 30,536 $ (28,717)
Provision for loan and lease losses -- -- --
Non-interest income 61,639 65,969 91,660
Non-interest expense 69,584 96,636 39,467
------------ ------------ ------------
Income before taxes 116,264 (131) 23,476
Income taxes (472) (42,112) (20,441)
------------ ------------ ------------
OPERATING EARNINGS $ 116,736 $ 41,981 $ 43,917
============ ============ ============
|
Treasury / Other reported operating earnings of $116.7 million in 2002, up
significantly from the two preceding years. This primarily reflected the reduction
in transfer pricing credits allocated to Regional Banking for its deposits,
the maturity in late 2001 of $2 billion of interest rate swaps that had significant
negative spreads, and the benefit of lower short-term interest rates, particularly
with the steeper yield curve.
Non-interest income for 2002 was $61.6 million compared with $66.0 million
for 2001 reflecting the higher gains from securities transactions in the current
year, increased Bank owned life insurance income, and revenue from trading activities.
Non-interest expense for 2002 declined $27.1 million from 2001. This reflected
a decline in the amortization of intangibles arising from the implementation
of FASB Statement No. 142 and lower unallocated personnel costs offset by higher
unallocated outside services and processing, equipment and occupancy, and telecommunication
expenses.
Income tax expense for each of the other business segments is calculated at
a statutory 35% tax rate. However, Huntington's overall effective tax rate is
lower and, as a result, Treasury / Other reflects the reconciling items to the
statutory tax rate in its Income taxes.
RESULTS FOR THE FOURTH QUARTER
Table 23 presents Huntington's results of operations for the recent eight
quarters and Table 24 presents selected stock, performance ratios, and capital
data for the same periods.
Fourth quarter 2002 earnings were $69.3 million, or $0.29 per common share.
This compared with earnings of $55.0 million, or $0.22 per common share, in
the year-ago fourth quarter, or earnings of $69.0 million, or $0.27 per common
share excluding the impact associated with Huntington's strategic restructuring
plan and the sold Florida banking and insurance operations. On this same comparative
basis, 2002 fourth quarter earnings were down 6%, however, earnings per common
share were flat, reflecting the benefit of the share repurchase program.
Fully taxable equivalent net interest income for 2002 fourth quarter was up
$11.7 million, or 6%, from the year-ago quarter. Excluding the impact of the
sold Florida banking operations, fully taxable equivalent net interest income
for 2002 fourth quarter increased $31.4 million, or 19%, reflecting a combination
of a 16% increase in average earning assets, and a 6 basis point, or an effective
2%, increase in the net interest margin to 3.62% from 3.56%.
The 16% increase in average earning assets from a year ago reflected a 15%
increase in average securities and a 16% increase in average loans and leases.
The increase in loans and leases was driven by a 36% increase in average consumer
loans, including a 15% increase in home equity loans and lines, a 105% increase
in residential mortgages, and a 44% increase in automobile loans and leases.
Since April 2002, automobile leases were recorded as direct financing leases,
which averaged $759 million in the 2002 fourth quarter. Automobile loans were
up 19% from the year-ago fourth quarter. Total average commercial loans were
down 3% and average commercial real estate loans increased 11% from the year-ago
quarter.
Non-interest income was $271.9 million, down $39.8 million, or 13%, from the
year-ago quarter. Excluding from the year-ago quarter the impact of Huntington's
strategic restructuring plan, as well as the impact of the sold Florida banking
and insurance operations, non-interest income was down $21.1 million, or 7%,
from a year earlier. Primarily contributing to this $21.1 million year-over-year
decrease were a $29.3 million, or 16%, decrease in operating lease income and
a $7.8 million, or 59%, decrease in mortgage banking income (primarily due to
a mortgage servicing rights temporary impairment recorded in the fourth quarter
of 2002). This was partially offset by a 17% increase in deposit service charges,
a 9% increase in brokerage and insurance income, a 14% increase in other service
charges, primarily electronic banking fees, and a 32% increase in other income.
Non-interest expense was $329.3 million in the 2002 fourth quarter, down $54.9
million from the year-ago quarter, but up $7.4 million, or 2%, after excluding
from that quarter $15.1 million in restructuring charges, as well as the expenses
related to the sold Florida banking and insurance operations. This $7.4 million
increase was primarily due to a $19.8 million, or 14%, decrease in operating
lease expense, partially offset by a $17.0 million, or 18%, increase in personnel
cost. Contributing to the increase in personnel costs were salary expense, incentive
compensation, and benefit costs. The increased salary expense reflected higher
staffing levels associated with the expansion of management and employee talent
at all levels, including the credit workout area. Higher sales commissions were
reflected across all lines of business. Higher fourth quarter benefit costs
were somewhat offset by a credit of $1.5 million in gains related to stock received
from the demutualization of certain insurance companies where Huntington owned
related policies. Benefit costs were increased by year-end accruals related
to medical, long-term disability, and pension expenses, which aggregated $9.1
million. Pension settlement losses for 2002 were $3.4 million and were recognized
all in the fourth quarter.
Outside data processing and other services was up $1.8 million, or 12%, and
professional services decreased $3.0 million, or 25%. Net occupancy expense
decreased $1.7 million, or 11%, due to a $1.5 million favorable settlement of
a real estate tax appeal. Amortization of intangible expense declined $2.4 million
due the implementation of FASB Statement No. 142 at the beginning of 2002. Other
expense in the fourth quarter increased $15.2 million, due in part to impairment
of an investment in an unconsolidated subsidiary that totaled $3.9 million.
Non-interest expense for the fourth quarter 2002 included accrual adjustments
that reduced total non-interest expense, in aggregate, by $0.7 million related
to litigation, marketing, and charitable contributions. Huntington also recorded
recoveries of previously recognized trust losses totaling $0.8 million, and
the receipt of a legal settlement for $0.7 million related to a joint venture
in which Huntington was a participant.
Restructuring reserves of $7.2 million established in 1998 and 2001 were released
in the 2002 fourth quarter based on management's assessment of future claims
against these reserves. The release of reserves consisted of a $5.0 million
legal settlement received by Huntington in December 2002 that related to the
1998 reserve and $2.2 million of reserves established in 2001. At December 31,
2002, Huntington had $4.1 million remaining in reserves established in 1998
for the exit of under performing business units and $14.4 million remaining
in restructuring reserves established in 2001. Also, at December 31, 2002, Huntington
had a contingency reserve of $1.8 million related to its August 2002 restructuring
of its interest in Huntington Merchant Services, L.L.C.
Net charge-offs for the 2002 fourth quarter were $83.2 million, or an annualized
1.83%, including $51.3 million in charge-offs associated with the fourth quarter
special credit actions. Excluding these charge-offs, net charge-offs were $31.9
million, or 0.70%, of average loans and leases (annualized). Loan and lease
loss provision expense in the fourth quarter was $51.2 million, up $4.2 million
from the year-ago quarter after excluding from that quarter an additional $50.0
million charge to the provision, as well as $4.0 million related to the sold
Florida banking operations.
ROE and ROA were 12.0% and 0.96%, respectively, for the 2002 fourth quarter,
compared to 11.9% and 1.12%, respectively, for the year-ago quarter, excluding
the impact resulting from the strategic restructuring and sale of the Florida
banking and insurance operations.
TABLE 23 - SELECTED QUARTERLY INCOME STATEMENTS
2002 2001
(in thousands, except per ------------------------------------------- -----------------------------------------------
share amounts) FOURTH THIRD SECOND FIRST Fourth Third Second First
--------- --------- --------- --------- --------- --------- --------- ---------
NET INTEREST INCOME $ 199,179 $ 191,265 $ 180,261 $ 178,869 $ 188,035 $ 179,078 $ 177,254 $ 170,921
Provision for loan and lease losses 51,236 54,304 49,876 39,010 101,075 34,053 99,444 22,754
--------- --------- --------- --------- --------- --------- --------- ---------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN AND LEASE
LOSSES 147,943 136,961 130,385 139,859 86,960 145,025 77,810 148,167
--------- --------- --------- --------- --------- --------- --------- ---------
Operating lease income 149,259 160,164 171,617 176,034 178,588 181,851 174,151 157,143
Service charges on deposit accounts 41,435 37,706 35,608 38,815 43,025 41,966 40,902 39,119
Brokerage and insurance 16,431 13,943 17,677 18,792 20,966 19,912 19,388 18,768
Trust services 15,306 14,997 16,247 15,501 15,321 15,485 15,178 14,314
Bank owned life insurance 10,722 10,723 10,722 10,956 11,001 11,001 9,561 9,560
Mortgage banking 5,530 2,594 7,835 16,074 14,082 13,308 18,168 8,960
Other service charges and fees 10,890 10,837 10,529 10,632 12,552 12,350 12,217 11,098
Gain on sale of Florida operations -- -- -- 182,470 -- -- -- --
Merchant Services gain -- 24,550 -- -- -- -- -- --
Securities gains (losses) 2,339 1,140 966 457 89 1,059 (2,503) 2,078
Other 19,943 21,948 17,513 12,802 16,005 15,533 14,619 13,127
--------- --------- --------- --------- --------- --------- --------- ---------
TOTAL NON-INTEREST INCOME 271,855 298,602 288,714 482,533 311,629 312,465 301,681 274,167
--------- --------- --------- --------- --------- --------- --------- ---------
Operating lease expense 120,747 125,743 131,695 140,785 140,575 138,538 158,437 121,076
Personnel costs 110,231 100,662 99,115 108,029 111,306 115,335 116,048 111,521
Equipment 17,337 17,378 16,659 16,949 20,593 20,151 19,844 19,972
Outside data processing and other
services 17,209 15,128 16,592 18,439 17,992 17,375 17,671 16,654
Net occupancy 13,370 14,676 14,504 16,989 19,766 19,082 18,004 19,597
Professional services 9,111 9,680 7,864 6,430 12,321 6,863 7,714 5,964
Marketing 6,186 7,491 7,231 7,003 6,345 6,921 7,852 9,939
Telecommunications 5,714 5,609 5,320 6,018 6,793 6,859 7,207 7,125
Printing and supplies 3,999 3,679 3,683 3,837 4,293 4,450 4,565 5,059
Franchise and other taxes 2,532 2,283 2,313 2,328 2,893 2,470 2,246 2,120
Amortization of intangible assets 204 204 235 1,376 10,100 10,114 10,435 10,576
Restructuring (releases) charges (7,211) -- -- 56,184 15,143 50,817 13,997 --
Other 29,880 16,963 18,535 17,229 16,083 25,648 6,887 33,091
--------- --------- --------- --------- --------- --------- --------- ---------
TOTAL NON-INTEREST EXPENSE 329,309 319,496 323,746 401,596 384,203 424,623 390,907 362,694
--------- --------- --------- --------- --------- --------- --------- ---------
INCOME BEFORE INCOME TAXES 90,489 116,067 95,353 220,796 14,386 32,867 (11,416) 59,640
Income taxes 21,226 28,052 24,375 125,321 (40,657)(1) 886 (12,548) 13,000
--------- --------- --------- --------- --------- --------- --------- ---------
NET INCOME $ 69,263 $ 88,015 $ 70,978 $ 95,475 $ 55,043 $ 31,981 $ 1,132 $ 46,640
========= ========= ========= ========= ========= ========= ========= =========
NET INCOME PER COMMON SHARE -- DILUTED $ 0.29 $ 0.36 $ 0.29 $ 0.38 $ 0.22 $ 0.13 $ 0.00 $ 0.19
CASH DIVIDENDS DECLARED PER COMMON
SHARE $ 0.16 $ 0.16 $ 0.16 $ 0.16 $ 0.16 $ 0.16 $ 0.20 $ 0.20
REVENUE - FULLY TAXABLE EQUIVALENT
(FTE)
Net Interest Income $ 199,179 $ 191,265 $ 180,261 $ 178,869 $ 188,035 $ 179,078 $ 177,254 $ 170,921
Tax Equivalent Adjustment (2) 1,869 1,096 1,071 1,169 1,292 1,442 1,616 2,002
--------- --------- --------- --------- --------- --------- --------- ---------
NET INTEREST INCOME - FTE $ 201,048 $ 192,361 $ 181,332 $ 180,038 $ 189,327 $ 180,520 $ 178,870 $ 172,923
========= ========= ========= ========= ========= ========= ========= =========
|
(1) Reflects a $32.5 million reduction related to the issuance of $400 million
of REIT subsidiary preferred stock, of which $50 million was sold to the public.
(2) Calculated assuming a 35% tax rate.
TABLE 24 - QUARTERLY STOCK SUMMARY, KEY RATIOS
AND STATISTICS, AND CAPITAL DATA
QUARTERLY COMMON STOCK SUMMARY
2002 2001
---------------------------------------- ----------------------------------------
(in thousands, except per share amounts) FOURTH THIRD SECOND FIRST FOURTH THIRD SECOND FIRST
------- --------- --------- --------- --------- -------- -------- ---------
COMMON STOCK PRICE
High $19.980 $ 20.430 $ 21.770 $ 20.310 $ 17.490 $ 19.280 $ 17.000 $ 18.000
Low 16.160 16.000 18.590 16.660 14.510 15.150 13.875 12.625
Close 18.710 18.190 19.420 19.700 17.190 17.310 16.375 14.250
Average daily closing price 18.769 19.142 20.089 18.332 16.269 17.696 14.936 15.258
DIVIDENDS
Cash dividends declared on common stock $ 0.16 $ 0.16 $ 0.16 $ 0.16 $ 0.16 $ 0.16 $ 0.20 $ 0.20
COMMON SHARES OUTSTANDING
Average -- Basic 233,581 239,925 246,106 250,749 251,193 251,148 251,024 250,998
Average -- Diluted 235,083 241,357 247,867 251,953 251,858 252,203 251,448 251,510
Ending 232,879 237,544 242,920 249,992 251,194 251,193 251,057 251,002
COMMON SHARE REPURCHASE PROGRAM
Authorized under repurchase program 22,000
Number of shares repurchased 4,110 6,262 7,329 1,458
------- --------- -------- ---------
Remaining shares authorized to repurchase (1) 2,841 6,951 13,213 20,542
======= ========= ======== =========
|
Note: Intra-day and closing stock price quotations were obtained from NASDAQ.
QUARTERLY KEY RATIOS AND STATISTICS
2002 2001
----------------------------------------- -----------------------------------------
FOURTH THIRD SECOND FIRST FOURTH THIRD SECOND FIRST
-------- -------- -------- -------- -------- -------- -------- --------
MARGIN ANALYSIS - AS A %
OF AVERAGE EARNING ASSETS (2)
Interest income 5.99% 6.26% 6.61% 6.46% 6.90% 7.50% 7.80% 8.22%
Interest expense 2.37% 2.57% 2.67% 2.93% 3.44% 4.20% 4.55% 5.03%
-------- -------- -------- -------- -------- -------- -------- --------
NET INTEREST MARGIN 3.62% 3.69% 3.94% 3.53% 3.46% 3.30% 3.25% 3.19%
======== ======== ======== ======== ======== ======== ======== ========
Return on average assets 1.03% 1.36% 1.15% 1.46% 0.78% 0.45% 0.02% 0.67%
Return on average shareholders' equity 12.9% 16.0% 12.6% 16.9% 9.5% 5.5% 0.2% 8.1%
|
CAPITAL DATA - END OF PERIOD
2002 2001
------------------------------------------- -------------------------------------------------
(in millions of dollars) FOURTH THIRD SECOND FIRST FOURTH THIRD SECOND FIRST
-------- -------- -------- ---------- ---------- ---------- ---------- ----------
Total Risk-Adjusted Assets $ 27,030 $ 26,128 $ 25,120 $ 24,786 $ 27,736 $ 27,592 $ 27,219 $ 27,079
Tier 1 Risk-Based Capital Ratio 8.34% 8.84% 9.45% 10.02% 7.02% 6.78% 6.86% 7.03%
Total Risk-Based Capital Ratio 11.25% 11.81% 12.49% 13.17% 10.07% 9.86% 9.96% 10.04%
Tier 1 Leverage Ratio 8.51% 9.08% 9.63% 9.46% 7.16% 6.88% 6.78% 6.94%
Tangible Equity / Asset Ratio 7.24% 7.66% 8.19% 8.78% 5.87% 5.86% 5.76% 5.82%
|
(1) A new repurchase program for 8 million shares was authorized in January
2003, canceling the remaining shares under this authorization.
(2) Presented on a fully taxable equivalent basis assuming a 35% tax rate.
OPERATING BASIS - PRESENTATION AND RECONCILIATION TO REPORTED GAAP RESULTS
Results from the 2001 second quarter through the third quarter of 2002 were
significantly impacted by the strategic restructuring announced in July 2001,
the subsequent sale of the Florida banking and insurance operations in 2002,
as well as other items. These items are explained in the section entitled Restructuring
and Other Items that follows.
For analytical purposes in understanding performance trends and for decision
making, management reviews and analyzes certain data, including Line of Business
performance, on an "operating basis", which excludes the impact of
these items and the operating results of the Florida operations sold as summarized
and presented in Tables 25 through 28. The specific tables included in this
section that reconcile reported, or GAAP, financial results to operating results
include:
o Table 25 - Reconciliation of Reported Earnings to Operating Earnings (2002,
2001 and 2000),
o Table 26 - Annual Income Statements, Selected Balance Sheet and Financial
Data (2002, 2001 and 2000),
o Table 27 - Consolidated Average Balance Sheets and Net Interest Margin Analysis
(2002, 2001 and 2000), and
o Table 28 - Selected Quarterly Income Statements - Reconciliation of Reported
to Operating Basis (2002 and 2001).
OPERATING BASIS SUMMARY REVIEW OF PERFORMANCE
Earnings on an operating basis for 2002 were $279.7 million, or $1.15 per
common share, compared with $246.6 million, or $0.98 per common share in 2001,
and $320.0 million, or $1.28 per common share in 2000. On this same basis, ROE
and ROA for 2002 were 12.6% and 1.10%, respectively, compared with 10.6% and
0.99%, respectively, for 2001, and 14.2% and 1.25%, respectively, in 2000.
RESTRUCTURING AND OTHER ITEMS
In July 2001, Huntington announced a strategic refocusing plan (the Plan).
Key components of the Plan included the sale of banking and insurance operations
in Florida, the consolidation of numerous non-Florida branch offices, as well
as credit-related and other actions to strengthen its financial performance
including the use of some of the excess capital to repurchase outstanding common
shares.
2002
The sale of the Florida banking operations to SunTrust Banks, Inc., which
closed February 15, 2002, included 143 banking offices and 456 ATMs, with approximately
$2.8 billion in loans and other tangible assets, and $4.8 billion in deposits
and other liabilities. Huntington's Florida insurance operation, the Orlando-based
J. Rolfe Davis Insurance Agency, Inc. (JRD), was sold on July 2, 2002 to members
of its management team. The JRD sale did not materially affect Huntington's
2002 financial results and is not expected to materially affect Huntington's
future financial results. Huntington remains committed to growing its other
insurance business in markets served by its retail and commercial banking operations.
A pre-tax gain of $182.5 million ($61.4 million after-tax, or $0.25 per share)
on the sale of the Florida banking operations was recorded in 2002 and was included
in non-interest income in Tables 25 and 26. Huntington recorded $49.0 million
of pre-tax restructuring charges ($31.8 million after-tax, or $0.13 per share)
in 2002, which included the release of $7.2 million of reserves in the fourth
quarter 2002, as reflected in non-interest expense. Combined with amounts recorded
in 2001, pre-tax restructuring charges related to the Plan totaled $199.4 million
($129.6 million after-tax, or $0.52 per share).
In August 2002, Huntington restructured its interest in Huntington Merchant
Services, L.L.C. (HMS), Huntington's merchant services business, in a transaction
with First Data Merchant Services Corporation (First Data), a subsidiary of
First Data Corporation. Under the agreement, Huntington extended its long-term
merchant services relationship with First Data. In addition, as part of the
transaction, First Data obtained all of Huntington's Florida-related merchant
services business and increased its equity interest in HMS. This transaction
resulted in a $24.5 million pre-tax gain ($16.0 million after tax, or $0.07
per share) in non-interest income. Huntington remains a nominal equity owner
in HMS.
2001
In 2001, the provision for loan and lease losses included credit quality charges
related to the Plan of $65.2 million in addition to $50.0 million to increase
Huntington's allowance for loan and lease losses in light of the higher charge-offs
and non-performing assets experienced in the second half of 2001. Included in
the 2001 securities gains in Tables 25 and 26 was a $5.3 million loss realized
from the sale of $15 million of Pacific Gas & Electric commercial paper
acquired from the Huntington Money Market Fund. Restructuring charges related
to the Plan totaled $80.0 million ($52.0 million after-tax, or $0.21 per share)
and consisted of $12.1 million for asset impairment, $16.2 million for the exit
or curtailment of certain e-commerce activities, $13.3 million related to owned
or leased facilities that Huntington had vacated, and $38.4 million related
to employee severance or retention, legal, accounting, consulting, reduction
of ATMs, and other operational costs.
In addition, in the fourth quarter there was a reduction in income taxes resulting
form the issuance of REIT subsidiary preferred securities, of which $50 million
was sold to the public.
Tables 25, 26, and 27 reconcile Huntington's reported results with its operating
earnings for each of the most recent three years. Table 28 reconciles reported
quarterly results with its operating earnings for the two most recent years.
The presentation of the Florida operations in Table 25 differs from the disclosure
presented in Note 6 to the consolidated financial statements because Note 6
reflects only the after-tax restructuring charges for 2002 related to the Florida
operations, which totaled $21.3 million ($32.7 million pre-tax). Because the
disclosure in Note 6 was intended only to show the pro forma impact without
the Florida operations, non-Florida related after-tax restructuring charges
of $15.2 million ($23.5 million pre-tax) as well as the Merchant Services restructuring
gain are included in the 2002 pro forma results (unaudited) presented in Note
6 but are excluded from operating earnings as presented in Table 26.
TABLE 25 - RECONCILIATION OF REPORTED EARNINGS
TO OPERATING EARNINGS
GAIN ON SALE OF
FLORIDA OPERATIONS/
RESTRUCTURING
(in thousands of dollars, REPORTED AND OTHER FLORIDA OPERATING
except per share amounts) EARNINGS ITEMS OPERATIONS EARNINGS
------------ ------------------- ------------ ------------
2002
Net interest income $ 749,574 $ -- $ 9,724 $ 739,850
Provision for loan and lease losses 194,426 -- 5,186 189,240
Securities gains 4,902 -- -- 4,902
Non-interest income 1,129,782 -- 13,343 1,116,439
Gain on sale of Florida operations 182,470 182,470 -- --
Merchant Services gain 24,550 24,550 -- --
Non-interest expense 1,325,174 -- 20,210 1,304,964
Restructuring charges 48,973 48,973 -- --
------------ ------------ ------------ ------------
PRE-TAX INCOME 522,705 158,047 (2,329) 366,987
INCOME TAXES 198,974 112,500 (804) 87,278
------------ ------------ ------------ ------------
NET INCOME $ 323,731 $ 45,547 $ (1,525) $ 279,709
============ ============ ============ ============
NET INCOME PER COMMON SHARE -- DILUTED $ 1.33 $ 0.19 $ (0.01) $ 1.15
============ ============ ============ ============
2001
Net interest income $ 715,288 $ -- $ 82,273 $ 633,015
Provision for loan and lease losses 257,326 115,199 15,121 127,006
Securities gains (losses) 723 (5,250) -- 5,973
Non-interest income 1,199,219 -- 76,992 1,122,227
Non-interest expense 1,482,470 -- 162,887 1,319,583
Restructuring charges 79,957 79,957 -- --
------------ ------------ ------------ ------------
Pre-tax income 95,477 (200,406) (18,743) 314,626
Income taxes (39,319) (102,642) (4,730) 68,053
------------ ------------ ------------ ------------
Net income $ 134,796 $ (97,764) $ (14,013) $ 246,573
============ ============ ============ ============
Net income per common share -- diluted $ 0.54 $ (0.39) $ (0.05) $ 0.98
============ ============ ============ ============
2000
Net interest income $ 670,110 $ -- $ 92,646 $ 577,464
Provision for loan and lease losses 61,464 -- 6,907 54,557
Securities gains 37,101 -- -- 37,101
Non-interest income 1,086,101 -- 46,742 1,039,359
Non-interest expense 1,283,131 -- 129,080 1,154,051
Restructuring charges -- -- -- --
------------ ------------ ------------ ------------
Pre-tax income 448,717 -- 3,401 445,316
Income taxes 126,299 -- 994 125,305
------------ ------------ ------------ ------------
Net income $ 322,418 $ -- $ 2,407 $ 320,011
============ ============ ============ ============
Net income per common share -- diluted $ 1.29 $ -- $ 0.01 $ 1.28
============ ============ ============ ============
|
TABLE 26 - ANNUAL INCOME STATEMENTS, SELECTED
BALANCE SHEET AND FINANCIAL DATA - RECONCILIATION OF REPORTED
TO OPERATING BASIS
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------
2002 2001
--------------------------------------- -------------------------------------------
(in thousands, except per share amounts) Reported Adjust.(1) Operating Reported Adjust.(1) Operating
---------- ---------- ---------- ----------- ----------- -----------
NET INTEREST INCOME $ 749,574 $ (9,724) $ 739,850 $ 715,288 $ (82,273) $ 633,015
Provision for loan and lease losses 194,426 (5,186) 189,240 257,326 (130,320) 127,006
---------- ---------- ---------- ----------- ----------- -----------
Net Interest Income After
PROVISION FOR LOAN AND LEASE LOSSES 555,148 (4,538) 550,610 457,962 48,047 506,009
---------- ---------- ---------- ----------- ----------- -----------
Operating lease income 657,074 -- 657,074 691,733 -- 691,733
Service charges on deposit accounts 153,564 (4,248) 149,316 165,012 (31,446) 133,566
Brokerage and insurance income 66,843 (6,915) 59,928 79,034 (24,608) 54,426
Trust services 62,051 (405) 61,646 60,298 (2,702) 57,596
Mortgage banking 32,033 79 32,112 54,518 (3,330) 51,188
Bank owned life insurance 43,123 -- 43,123 41,123 -- 41,123
Other service charges and fees 42,888 (1,514) 41,374 48,217 (11,290) 36,927
Gain on sale of Florida operations 182,470 (182,470) -- -- -- --
Merchant Services gain 24,550 (24,550) -- -- -- --
Securities gains 4,902 -- 4,902 723 5,250 5,973
Other 72,206 (340) 71,866 59,284 (3,616) 55,668
---------- ---------- ---------- ----------- ----------- -----------
TOTAL NON-INTEREST INCOME 1,341,704 (220,363) 1,121,341 1,199,942 (71,742) 1,128,200
---------- ---------- ---------- ----------- ----------- -----------
Operating lease expense 518,970 -- 518,970 558,626 -- 558,626
Personnel costs 418,037 (11,522) 406,515 454,210 (73,695) 380,515
Equipment 68,323 (1,418) 66,905 80,560 (9,997) 70,563
Outside data processing and other services 67,368 (1,342) 66,026 69,692 (10,406) 59,286
Net occupancy 59,539 (2,582) 56,957 76,449 (18,129) 58,320
Marketing 27,911 159 28,070 31,057 (4,396) 26,661
Professional services 33,085 (161) 32,924 32,862 (782) 32,080
Telecommunications 22,661 (754) 21,907 27,984 (4,693) 23,291
Printing and supplies 15,198 (330) 14,868 18,367 (3,377) 14,990
Franchise and other taxes 9,456 (2) 9,454 9,729 (60) 9,669
Amortization of intangible assets 2,019 (1,157) 862 41,225 (30,180) 11,045
Restructuring charges 48,973 (48,973) -- 79,957 (79,957) --
Other 82,607 (1,101) 81,506 81,709 (7,172) 74,537
---------- ---------- ---------- ----------- ----------- -----------
TOTAL NON-INTEREST EXPENSE 1,374,147 (69,183) 1,304,964 1,562,427 (242,844) 1,319,583
---------- ---------- ---------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES 522,705 (155,718) 366,987 95,477 219,149 314,626
Income taxes 198,974 (111,696) 87,278 (39,319) 107,372 68,053
---------- ---------- ---------- ----------- ----------- -----------
NET INCOME $ 323,731 $ (44,022) $ 279,709 $ 134,796 $ 111,777 $ 246,573
========== ========== ========== =========== =========== ===========
PER COMMON SHARE (2)
Net income - basic $ 1.34 $ (0.19) $ 1.15 $ 0.54 $ 0.44 $ 0.98
Net income - diluted 1.33 (0.18) 1.15 0.54 0.44 0.98
Cash dividends declared 0.64 0.00 0.64 0.72 0.00 0.72
NET INTEREST INCOME (FTE)
Net Interest Income $ 749,574 $ (9,724) 739,850 $ 715,288 $ (82,273) $ 633,015
Tax Equivalent Adjustment (3) 5,205 -- 5,205 6,352 -- 6,352
---------- ---------- ---------- ----------- ----------- -----------
Net Interest Income (FTE) 754,779 (9,724) 745,055 721,640 (82,273) 639,367
Non-Interest Income 1,341,704 (220,363) 1,121,341 1,199,942 (71,742) 1,128,200
---------- ---------- ---------- ----------- ----------- -----------
TOTAL REVENUE (FTE) $2,096,483 $ (230,087) $1,866,396 $ 1,921,582 $ (154,015) $ 1,767,567
========== ========== ========== =========== =========== ===========
KEY RATIOS AND STATISTICS
Return on average assets 1.25% (0.15)% 1.10% 0.48% 0.51% 0.99%
Return on average shareholders' equity 14.6 (2.0) 12.6 5.8 4.8 10.6
Net interest margin (FTE) 3.62 0.01 3.63 3.29 0.01 3.30
Efficiency ratio (4) 70.2 (0.1) 70.1 75.0 (0.7) 74.3
Effective tax rate 38.1 (14.3) 23.8 (41.2) 62.8 21.6
|
(1) See page 52 for definition of adjustments.
(2) 2000 adjusted for the stock dividend paid July 2000.
(3) Represents the tax-exempt portion of net interest income increased by
an amount equivalent to taxes that would have been paid if this income had been
taxed at a 35% statutory tax rate.
(4) Calculated on revenue, excluding gains, and expenses excluding amortization
of intangible assets and restructuring charges.
TABLE 26 - ANNUAL INCOME STATEMENTS, SELECTED
BALANCE SHEET AND FINANCIAL DATA - RECONCILIATION OF REPORTED
TO OPERATING BASIS
YEAR ENDED DECEMBER 31,
---------------------------------------------
2000
---------------------------------------------
(in thousands, except per share amounts) Reported Adjust. (1) Operating
------------ ------------ ------------
NET INTEREST INCOME $ 670,110 $ (92,646) $ 577,464
Provision for loan and lease losses 61,464 (6,907) 54,557
------------ ------------ ------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN AND LEASE LOSSES 608,646 (85,739) 522,907
------------ ------------ ------------
Operating lease income 623,835 -- 623,835
Service charges on deposit accounts 161,426 (30,976) 130,450
Brokerage and insurance income 61,871 (115) 61,756
Trust services 53,613 (2,719) 50,894
Mortgage banking 32,772 -- 32,772
Bank owned life insurance 39,544 -- 39,544
Other service charges and fees 43,883 (10,900) 32,983
Gain on sale of Florida operations -- -- --
Merchant Services gain -- -- --
Securities gains 37,101 -- 37,101
Other 69,157 (2,032) 67,125
------------ ------------ ------------
TOTAL NON-INTEREST INCOME 1,123,202 (46,742) 1,076,460
------------ ------------ ------------
Operating lease expense 494,800 -- 494,800
Personnel costs 396,230 (51,825) 344,405
Equipment 78,069 (7,345) 70,724
Outside data processing and other services 62,011 (4,788) 57,223
Net occupancy 75,197 (17,333) 57,864
Marketing 34,884 (1,683) 33,201
Professional services 22,721 (530) 22,191
Telecommunications 26,225 (3,091) 23,134
Printing and supplies 19,634 (3,387) 16,247
Franchise and other taxes 11,077 (61) 11,016
Amortization of intangible assets 39,207 (29,256) 9,951
Restructuring charges -- -- --
Other 23,076 (9,781) 13,295
------------ ------------ ------------
TOTAL NON-INTEREST EXPENSE 1,283,131 (129,080) 1,154,051
------------ ------------ ------------
INCOME BEFORE INCOME TAXES 448,717 (3,401) 445,316
Income taxes 126,299 (994) 125,305
------------ ------------ ------------
NET INCOME $ 322,418 $ (2,407) $ 320,011
============ ============ ============
PER COMMON SHARE (2)
Net income - basic $ 1.30 $ (0.01) $ 1.29
Net income - diluted 1.29 (0.01) 1.28
Cash dividends declared 0.76 0.00 0.76
NET INTEREST INCOME (FTE)
Net Interest Income $ 670,110 $ (92,646) $ 577,464
Tax Equivalent Adjustment (3) 8,310 -- 8,310
------------ ------------ ------------
Net Interest Income (FTE) 678,420 (92,646) 585,774
Non-Interest Income 1,123,202 (46,742) 1,076,460
------------ ------------ ------------
TOTAL REVENUE (FTE) $ 1,801,622 $ (139,388) $ 1,662,234
============ ============ ============
KEY RATIOS AND STATISTICS
Return on average assets 1.12% 0.13% 1.25%
Return on average shareholders' equity 14.3 (0.1) 14.2
Net interest margin (FTE) 3.00 (0.11) 2.89
Efficiency ratio (4) 70.5 (0.1) 70.4
Effective tax rate 28.1 0.0 28.1
|
(1) See page 52 for definition of adjustments.
(2) 2000 adjusted for the stock dividend paid July 2000.
(3) Represents the tax-exempt portion of net interest income increased by
an amount equivalent to taxes that would have been paid if this income had been
taxed at a 35% statutory tax rate.
(4) Calculated on revenue, excluding gains, and expenses excluding amortization
of intangible assets and restructuring charges.
TABLE 27 - CONSOLIDATED AVERAGE BALANCE SHEETS AND
NET INTEREST MARGIN ANALYSIS - RECONCILIATION OF REPORTED TO
OPERATING BASIS
AVERAGE BALANCE
--------------------------------------------------------------------------
2002 2001
----------------------------------- -----------------------------------
(in millions of dollars)
Fully Taxable Equivalent Basis (2) Reported Adjust. (1) Operating Reported Adjust. (1) Operating
-------- ----------- --------- -------- ----------- ---------
ASSETS
Interest bearing deposits in banks $ 33 $ -- $ 33 $ 7 $ -- $ 7
Trading account securities 7 -- 7 25 -- 25
Federal funds sold and securities purchased
under resale agreements 72 -- 72 107 -- 107
Mortgages held for sale 322 -- 322 360 -- 360
Securities: (3)
Taxable 2,859 -- 2,859 3,144 -- 3,144
Tax exempt 135 -- 135 174 -- 174
-------- ----------- -------- -------- ----------- --------
Total Securities 2,994 -- 2,994 3,318 -- 3,318
-------- ----------- -------- -------- ----------- --------
Loans and leases:
Commercial loans 5,679 94 5,585 6,650 747 5,903
Real estate
Construction (4) 1,216 13 1,203 1,221 109 1,112
Commercial 2,378 41 2,337 2,340 306 2,034
Consumer
Automobile loans and leases 3,196 42 3,154 2,839 325 2,514
Home equity 3,085 104 2,981 3,398 713 2,685
Residential mortgage (4) 1,438 29 1,409 1,048 239 809
Other loans 425 15 410 590 114 476
-------- ----------- -------- -------- ----------- --------
Total consumer 8,144 190 7,954 7,875 1,391 6,484
-------- ----------- -------- -------- ----------- --------
Total loans and leases 17,417 338 17,079 18,086 2,553 15,533
-------- ----------- -------- -------- ----------- --------
Allowance for loan and lease losses 374 2 372 307 34 273
-------- ----------- -------- -------- ----------- --------
Net loans and leases 17,043 336 16,707 17,779 2,519 15,260
-------- ----------- -------- -------- ----------- --------
Total earning assets /
interest income / average rates 20,845 338 20,507 21,903 2,553 19,350
-------- ----------- -------- -------- ----------- --------
Operating lease assets 2,602 -- 2,602 2,970 -- 2,970
Cash and due from banks 757 12 745 912 81 831
Intangible assets 293 86 207 736 540 196
All other assets 1,800 3 1,797 1,863 73 1,790
-------- ----------- -------- -------- ----------- --------
TOTAL ASSETS $ 25,923 $ 437 $ 25,486 $ 28,077 $ 3,213 $ 24,864
======== =========== ======== ======== =========== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Core deposits
Non-interest bearing deposits $ 2,902 $ 75 $ 2,827 $ 3,304 $ 581 $ 2,723
Interest bearing demand deposits 5,161 193 4,968 5,005 1,386 3,619
Savings deposits 2,853 66 2,787 3,478 552 2,926
Other domestic time deposits 4,349 228 4,121 5,883 1,813 4,070
-------- ----------- -------- -------- ----------- --------
Total core deposits 15,265 562 14,703 17,670 4,332 13,338
-------- ----------- -------- -------- ----------- --------
Domestic time deposits of $100,000 or more 851 21 830 1,280 209 1,071
Brokered time deposits and negotiable CDs 731 -- 731 128 -- 128
Foreign time deposits 337 -- 337 283 6 277
-------- ----------- -------- -------- ----------- --------
Total deposits 17,184 583 16,601 19,361 4,547 14,814
-------- ----------- -------- -------- ----------- --------
Short-term borrowings 2,128 18 2,110 2,325 137 2,188
Medium-term notes 1,865 (167) 2,032 2,024 (1,471) 3,495
Federal Home Loan Bank advances 279 -- 279 19 -- 19
Subordinated notes and other long-term debt,
including preferred capital securities 1,198 -- 1,198 1,161 -- 1,161
-------- ----------- -------- -------- ----------- --------
Total interest bearing liabilities /
interest expense / average rates 19,752 359 19,393 21,586 2,632 18,954
-------- ----------- -------- -------- ----------- --------
All other liabilities 1,053 3 1,050 859 -- 859
Shareholders' equity 2,216 -- 2,216 2,328 -- 2,328
-------- ----------- -------- -------- ----------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 25,923 $ 437 $ 25,486 $ 28,077 $ 3,213 $ 24,864
======== =========== ======== ======== =========== ========
AVERAGE BALANCE
----------------------------------
2000
----------------------------------
(in millions of dollars)
Fully Taxable Equivalent Basis (2) Reported Adjust. (1) Operating
-------- ----------- --------
ASSETS
Interest bearing deposits in banks $ 6 $ -- $ 6
Trading account securities 15 -- 15
Federal funds sold and securities purchased
under resale agreements 87 -- 87
Mortgages held for sale 109 -- 109
Securities: (3)
Taxable 4,316 -- 4,316
Tax exempt 273 -- 273
-------- ----------- --------
Total Securities 4,589 -- 4,589
-------- ----------- --------
Loans and leases:
Commercial loans 6,450 647 5,803
Real estate
Construction (4) 1,184 227 957
Commercial 2,186 286 1,900
Consumer
Automobile loans and leases 3,123 210 2,913
Home equity 2,990 552 2,438
Residential mortgage (4) 1,379 377 1,002
Other loans 530 69 461
-------- ----------- --------
Total consumer 8,022 1,208 6,814
-------- ----------- --------
Total loans and leases 17,842 2,368 15,474
-------- ----------- --------
Allowance for loan and lease losses 274 (20) 294
-------- ----------- --------
Net loans and leases 17,568 2,388 15,180
-------- ----------- --------
Total earning assets /
interest income / average rates 22,648 2,368 20,280
-------- ----------- --------
Operating lease assets 2,751 -- 2,751
Cash and due from banks 1,008 182 826
Intangible assets 709 557 152
All other assets 1,818 26 1,792
-------- ----------- --------
TOTAL ASSETS $ 28,660 $ 3,153 $ 25,507
======== =========== ========
Liabilities and Shareholders' Equity
Core deposits
Non-interest bearing deposits $ 3,421 $ 600 $ 2,821
Interest bearing demand deposits 4,291 1,194 3,097
Savings deposits 3,563 576 2,987
Other domestic time deposits 5,872 1,734 4,138
-------- ----------- --------
Total core deposits 17,147 4,104 13,043
-------- ----------- --------
Domestic time deposits of $100,000 or more 1,502 209 1,293
Brokered time deposits and negotiable CDs 502 -- 502
Foreign time deposits 539 3 536
-------- ----------- --------
Total deposits 19,690 4,316 15,374
-------- ----------- --------
Short-term borrowings 1,966 102 1,864
Medium-term notes 2,894 (1,269) 4,163
Federal Home Loan Bank advances 13 -- 13
Subordinated notes and other long-term debt,
including preferred capital securities 1,111 -- 1,111
-------- ----------- --------
Total interest bearing liabilities /
interest expense / average rates 22,253 2,549 19,704
-------- ----------- --------
All other liabilities 735 4 731
Shareholders' equity 2,251 -- 2,251
-------- ----------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 28,660 $ 3,153 $ 25,507
======== =========== ========
|
(1) See page 52 for definition of adjustments.
(2) Fully taxable equivalent yields are calculated assuming a 35% tax rate.
(3) Average rates computed using historical cost average balances and do not
give effect to changes in fair value of securities available for sale.
(4) Residential construction loans have been reclassified from Real estate
- Construction to Residential mortgage loans.
(5) Loan, lease, and deposit average rates include the impact of applicable
derivatives.
Note: Individual loan and leases components include fees and cash basis interest
received on non-accrual loans.
TABLE 27 - CONSOLIDATED AVERAGE BALANCE SHEETS AND
NET INTEREST MARGIN ANALYSIS - RECONCILIATION OF REPORTED TO
OPERATING BASIS
INTEREST INCOME / EXPENSE
---------------------------------------------------------------------------------
2002 2001
----------------------------------- -------------------------------------------
(in millions of dollars)
Fully Taxable Equivalent Basis (2) Reported Adjust. (1) Operating Reported Adjust. (1) Operating
---------- ----------- --------- ------------ ------------ ------------
EARNING ASSETS
Interest bearing deposits in banks $ 0.8 $ -- $ 0.8 $ 0.2 $ -- $ 0.2
Trading account securities 0.3 -- 0.3 1.3 -- 1.3
Federal funds sold and securities purchased
under resale agreements 1.1 -- 1.1 4.5 -- 4.5
Mortgages held for sale 20.5 -- 20.5 25.0 -- 25.0
Securities: (3)
Taxable 173.0 -- 173.0 206.9 -- 206.9
Tax exempt 10.1 -- 10.1 13.0 -- 13.0
---------- --------- --------- ------------ ------------ ------------
Total Securities 183.1 -- 183.1 219.9 -- 219.9
---------- --------- --------- ------------ ------------ ------------
Loans and leases:
Commercial loans 319.4 5.8 313.6 480.5 57.7 422.8
Real estate
Construction (4) 57.1 0.7 56.4 86.4 8.3 78.1
Commercial 147.4 2.6 144.8 177.3 22.4 154.9
Consumer
Automobile loans and leases 261.1 3.8 257.3 255.0 25.0 230.0
Home equity 183.9 8.2 175.7 279.7 62.4 217.3
Residential mortgage (4) 91.4 2.0 89.4 81.7 18.3 63.4
Other loans 32.3 1.3 31.0 49.6 11.0 38.6
---------- --------- --------- ------------ ------------ ------------
Total consumer 568.7 15.3 553.4 666.0 116.7 549.3
---------- --------- --------- ------------ ------------ ------------
Total loans and leases 1,092.6 24.4 1,068.2 1,410.2 205.1 1,205.1
---------- --------- --------- ------------ ------------ ------------
Total earning assets /
interest income / average rates 1,298.4 24.4 1,274.0 1,661.1 205.1 1,456.0
---------- --------- --------- ------------ ------------ ------------
INTEREST BEARING LIABILITIES
Core deposits
Non-interest bearing deposits -- -- -- -- -- --
Interest bearing demand deposits 89.5 3.6 85.9 134.0 38.4 95.6
Savings deposits 50.0 1.4 48.6 106.2 16.5 89.7
Other domestic time deposits 195.2 11.4 183.8 329.7 102.2 227.5
---------- --------- --------- ------------ ------------ ------------
Total core deposits 334.7 16.4 318.3 569.9 157.1 412.8
---------- --------- --------- ------------ ------------ ------------
Domestic time deposits of $100,000 or more 28.8 1.0 27.8 66.8 11.7 55.1
Brokered time deposits and negotiable CDs 17.3 -- 17.3 6.6 -- 6.6
Foreign time deposits 4.9 -- 4.9 10.8 0.2 10.6
---------- --------- --------- ------------ ------------ ------------
Total deposits 385.7 17.4 368.3 654.1 169.0 485.1
---------- --------- --------- ------------ ------------ ------------
Short-term borrowings 42.7 0.2 42.5 95.8 4.4 91.4
Medium-term notes 61.7 (3.0) 64.7 121.7 (50.5) 172.2
Federal Home Loan Bank advances 5.6 -- 5.6 1.2 -- 1.2
Subordinated notes and other long-term debt,
including preferred capital securities 47.9 0.1 47.8 66.7 -- 66.7
---------- --------- --------- ------------ ------------ ------------
Total interest bearing liabilities /
interest expense / average rates 543.6 14.7 528.9 939.5 122.9 816.6
---------- --------- --------- ------------ ------------ ------------
NET INTEREST INCOME $ 754.8 $ 9.7 $ 745.1 $ 721.6 $ 82.2 $ 639.4
========== ========= ========= ============ ============ ============
INTEREST INCOME / EXPENSE
-------------------------------------------
2000
-------------------------------------------
(in millions of dollars)
Fully Taxable Equivalent Basis (2) Reported Adjust. (1) Operating
------------ ------------ ------------
EARNING ASSETS
Interest bearing deposits in banks $ 0.3 $ -- $ 0.3
Trading account securities 1.1 -- 1.1
Federal funds sold and securities purchased
under resale agreements 5.5 -- 5.5
Mortgages held for sale 8.7 -- 8.7
Securities: (3)
Taxable 269.5 -- 269.5
Tax exempt 20.8 -- 20.8
------------ ------------ ------------
Total Securities 290.3 -- 290.3
------------ ------------ ------------
Loans and leases:
Commercial loans 557.9 61.0 496.9
Real estate
Construction (4) 106.0 18.4 87.6
Commercial 184.1 23.3 160.8
Consumer
Automobile loans and leases 270.9 14.3 256.6
Home equity 254.8 44.5 210.3
Residential mortgage (4) 107.1 24.3 82.8
Other loans 54.9 0.3 54.6
------------ ------------ ------------
Total consumer 687.7 83.4 604.3
------------ ------------ ------------
Total loans and leases 1,535.7 186.1 1,349.6
------------ ------------ ------------
Total earning assets /
interest income / average rates 1,841.6 186.1 1,655.5
------------ ------------ ------------
INTEREST BEARING LIABILITIES
Core deposits
Non-interest bearing deposits -- -- --
Interest bearing demand deposits 143.5 42.3 101.2
Savings deposits 145.3 22.7 122.6
Other domestic time deposits 334.2 98.3 235.9
------------ ------------ ------------
Total core deposits 623.0 163.3 459.7
------------ ------------ ------------
Domestic time deposits of $100,000 or more 90.4 12.4 78.0
Brokered time deposits and negotiable CDs 31.9 -- 31.9
Foreign time deposits 34.0 0.2 33.8
------------ ------------ ------------
Total deposits 779.3 175.9 603.4
------------ ------------ ------------
Short-term borrowings 113.1 5.4 107.7
Medium-term notes 189.3 (87.8) 277.1
Federal Home Loan Bank advances 0.8 -- 0.8
Subordinated notes and other long-term debt,
including preferred capital securities 80.7 -- 80.7
------------ ------------ ------------
Total interest bearing liabilities /
interest expense / average rates 1,163.2 93.5 1,069.7
------------ ------------ ------------
NET INTEREST INCOME $ 678.4 $ 92.6 $ 585.8
============ ============ ============
|
(1) See page 52 for definition of adjustments.
(2) Fully taxable equivalent yields are calculated assuming a 35% tax rate.
(3) Average rates computed using historical cost average balances and do not
give effect to changes in fair value of securities available for sale.
(4) Residential construction loans have been reclassified from Real estate
- Construction to Residential mortgage loans.
(5) Loan, lease, and deposit average rates include the impact of applicable
derivatives.
Note: Individual loan and leases components include fees and cash basis interest
received on non-accrual loans.
TABLE 27 - CONSOLIDATED AVERAGE BALANCE SHEETS AND
NET INTEREST MARGIN ANALYSIS - RECONCILIATION OF REPORTED TO
OPERATING BASIS
AVERAGE RATE (5)
--------------------------------------------------------------------------------
2002 2001
------------------------------------- ----------------------------------------
(in millions of dollars)
Fully Taxable Equivalent Basis (2) Reported Adjust. (1) Operating Reported Adjust. (1) Operating
-------- ----------- --------- -------- ------------ ------------
EARNING ASSETS
Interest bearing deposits in banks 2.38% --% 2.38% 3.43% --% 3.43%
Trading account securities 4.11 -- 4.11 5.13 -- 5.13
Federal funds sold and securities purchased
under resale agreements 1.56 -- 1.56 4.19 -- 4.19
Mortgages held for sale 6.35 -- 6.35 6.95 -- 6.95
Securities: (3)
Taxable 6.06 -- 6.06 6.58 -- 6.58
Tax exempt 7.42 -- 7.42 7.49 -- 7.49
-------- ----------- --------- ------- ------------ ------------
Total Securities 6.12 -- 6.12 6.63 -- 6.63
-------- ----------- --------- ------- ------------ ------------
Loans and leases:
Commercial loans 5.62 -- 5.62 7.22 0.04 7.18
Real estate
Construction (4) 4.70 0.01 4.69 7.08 0.03 7.05
Commercial 6.20 -- 6.20 7.58 (0.06) 7.64
Consumer
Automobile loans and leases 8.17 -- 8.17 8.98 (0.18) 9.16
Home equity 5.96 0.06 5.90 8.23 0.09 8.14
Residential mortgage (4) 6.36 0.02 6.34 7.79 0.02 7.77
Other loans 7.59 0.03 7.56 8.41 0.05 8.36
-------- ----------- --------- ------- ------------ ------------
Total consumer 6.98 0.02 6.96 8.46 (0.06) 8.52
-------- ----------- --------- ------- ------------ ------------
Total loans and leases 6.27 0.01 6.26 7.80 0.01 7.79
-------- ----------- --------- ------- ------------ ------------
Total earning assets /
interest income / average rates 6.23% 0.01% 6.22% 7.58% 0.04% 7.54%
-------- ----------- --------- ------- ------------ ------------
INTEREST BEARING LIABILITIES
Core deposits
Non-interest bearing deposits
Interest bearing demand deposits 1.73% 0.01% 1.72% 2.68% 0.03% 2.65%
Savings deposits 1.75 -- 1.75 3.05 (0.02) 3.07
Other domestic time deposits 4.49 0.02 4.47 5.60 -- 5.60
-------- ----------- --------- ------- ------------ ------------
Total core deposits 2.71 0.02 2.69 3.97 0.07 3.90
-------- ----------- --------- ------- ------------ ------------
Domestic time deposits of $100,000 or more 3.39 0.04 3.35 5.22 0.07 5.15
Brokered time deposits and negotiable CDs 2.36 -- 2.36 5.12 -- 5.12
Foreign time deposits 1.47 -- 1.47 3.82 (0.01) 3.83
-------- ----------- --------- ------- ------------ ------------
Total deposits 2.70 0.02 2.68 4.07 0.06 4.01
-------- ----------- --------- ------- ------------ ------------
Short-term borrowings 2.01 -- 2.01 4.12 (0.06) 4.18
Medium-term notes 3.31 0.13 3.18 6.01 1.08 4.93
Federal Home Loan Bank advances 2.00 -- 2.00 6.17 -- 6.17
Subordinated notes and other long-term debt,
including preferred capital securities 4.00 -- 4.00 5.75 -- 5.75
-------- ----------- --------- ------- ------------ ------------
Total interest bearing liabilities /
interest expense / average rates 2.75% 0.02% 2.73% 4.35% 0.04% 4.31%
-------- ----------- --------- ------- ------------ ------------
Net interest rate spread 3.48% (0.01)% 3.49% 3.23% --% 3.23%
Impact of non-interest bearing funds on margin 0.14 -- 0.14 0.06 (0.01) 0.07
-------- ----------- --------- ------- ------------ ------------
NET INTEREST MARGIN 3.62% (0.01)% 3.63% 3.29% (0.01)% 3.30%
======== =========== ========= ======= ============ ============
AVERAGE RATE (5)
-------------------------------------------
2000
-------------------------------------------
(in millions of dollars)
Fully Taxable Equivalent Basis (2) Reported Adjust. (1) Operating
----------- ------------ ------------
EARNING ASSETS
Interest bearing deposits in banks 5.03% --% 5.03%
Trading account securities 7.11 -- 7.11
Federal funds sold and securities purchased -- -- --
under resale agreements 6.33 -- 6.33
Mortgages held for sale 7.96 -- 7.96
Securities: (3) -- -- --
Taxable 6.24 -- 6.24
Tax exempt 7.61 -- 7.61
------------ ------------ ------------
Total Securities 6.33 -- 6.33
------------ ------------ ------------
Loans and leases:
Commercial loans 8.65 0.06 8.59
Real estate -- -- --
Construction (4) 8.96 (0.25) 9.21
Commercial 8.42 (0.07) 8.49
Consumer -- -- --
Automobile loans and leases 8.67 (0.15) 8.82
Home equity 8.52 (0.15) 8.67
Residential mortgage (4) 7.77 (0.46) 8.23
Other loans 10.35 (1.56) 11.91
------------ ------------ ------------
Total consumer 8.57 (0.33) 8.90
------------ ------------ ------------
Total loans and leases 8.61 (0.15) 8.76
------------ ------------ ------------
Total earning assets /
interest income / average rates 8.13% (0.05)% 8.18%
------------ ------------ ------------
INTEREST BEARING LIABILITIES
Core deposits
Non-interest bearing deposits
Interest bearing demand deposits 3.34% 0.08% 3.26%
Savings deposits 4.08 (0.03) 4.11
Other domestic time deposits 5.69 (0.02) 5.71
------------ ------------ ------------
Total core deposits 4.54 0.03 4.51
------------ ------------ ------------
Domestic time deposits of $100,000 or more 6.01 (0.02) 6.03
Brokered time deposits and negotiable CDs 6.35 -- 6.35
Foreign time deposits 6.31 -- 6.31
------------ ------------ ------------
Total deposits 4.79 (0.02) 4.81
------------ ------------ ------------
Short-term borrowings 5.75 (0.03) 5.78
Medium-term notes 6.54 (0.12) 6.66
Federal Home Loan Bank advances 6.32 -- 6.32
Subordinated notes and other long-term debt,
including preferred capital securities 7.27 -- 7.27
------------ ------------ ------------
Total interest bearing liabilities /
interest expense / average rates 5.23% (0.20)% 5.43%
------------ ------------ ------------
Net interest rate spread 2.90% 0.15% 2.75%
Impact of non-interest bearing funds on margin 0.10 (0.04) 0.14
------------ ------------ ------------
NET INTEREST MARGIN 3.00% 0.11% 2.89%
============ ============ ============
|
(1) See page 52 for definition of adjustments.
(2) Fully taxable equivalent yields are calculated assuming a 35% tax rate.
(3) Average rates computed using historical cost average balances and do not
give effect to changes in fair value of securities available for sale.
(4) Residential construction loans have been reclassified from Real estate
- Construction to Residential mortgage loans.
(5) Loan, lease, and deposit average rates include the impact of applicable
derivatives.
Note: Individual loan and leases components include fees and cash basis interest
received on non-accrual loans.
TABLE 28 - SELECTED QUARTERLY INCOME STATEMENTS
- RECONCILIATION OF REPORTED TO OPERATING BASIS
2002 FOURTH QUARTER 2002 THIRD QUARTER
--------------------------------------- -------------------------------------
(in thousands, except per share amounts) Reported Adjust. (1) Operating Reported Adjust. (1) Operating
--------- ----------- --------- --------- ----------- ---------
NET INTEREST INCOME $ 199,179 $ -- $ 199,179 $ 191,265 $ -- $ 191,265
Provision for loan and lease losses 51,236 -- 51,236 54,304 -- 54,304
NET INTEREST INCOME AFTER
PROVISION FOR LOAN AND LEASE LOSSES 147,943 -- 147,943 136,961 -- 136,961
Operating lease income 149,259 -- 149,259 160,164 160,164
Service charges on deposit accounts 41,435 -- 41,435 37,706 -- 37,706
Brokerage and insurance 16,431 -- 16,431 13,943 -- 13,943
Trust services 15,306 -- 15,306 14,997 -- 14,997
Bank owned life insurance 10,722 -- 10,722 10,723 -- 10,723
Mortgage banking 5,530 -- 5,530 2,594 -- 2,594
Other service charges and fees 10,890 -- 10,890 10,837 -- 10,837
Gain on sale of Florida operations -- -- -- -- -- --
Merchant Services gain -- -- -- 24,550 24,550 --
Securities gains (losses) 2,339 -- 2,339 1,140 -- 1,140
Other 19,943 -- 19,943 21,948 -- 21,948
--------- ----------- --------- --------- ----------- ---------
TOTAL NON-INTEREST INCOME 271,855 -- 271,855 298,602 24,550 274,052
--------- ----------- --------- --------- ----------- ---------
Operating lease expense 120,747 -- 120,747 125,743 -- 125,743
Personnel costs 110,231 -- 110,231 100,662 -- 100,662
Equipment 17,337 -- 17,337 17,378 -- 17,378
Outside data processing and other services 17,209 -- 17,209 15,128 -- 15,128
Net occupancy 13,370 -- 13,370 14,676 -- 14,676
Professional services 9,111 -- 9,111 9,680 -- 9,680
Marketing 6,186 -- 6,186 7,491 -- 7,491
Telecommunications 5,714 -- 5,714 5,609 -- 5,609
Printing and supplies 3,999 -- 3,999 3,679 -- 3,679
Franchise and other taxes 2,532 -- 2,532 2,283 -- 2,283
Amortization of intangible assets 204 -- 204 204 -- 204
Restructuring Charges (7,211) (7,211) -- -- -- --
Other 29,880 -- 29,880 16,963 -- 16,963
--------- ----------- --------- --------- ----------- ---------
TOTAL NON-INTEREST EXPENSE 329,309 (7,211) 336,520 319,496 -- 319,496
--------- ----------- --------- --------- ----------- ---------
INCOME BEFORE INCOME TAXES 90,489 7,211 83,278 116,067 24,550 91,517
Income taxes 21,226 2,524 18,702 28,052 8,593 19,459
--------- ----------- --------- --------- ----------- ---------
NET INCOME $ 69,263 $ 4,687 $ 64,576 $ 88,015 $ 15,957 $ 72,058
========= =========== ========= ========= =========== =========
NET INCOME PER COMMON SHARE -- DILUTED $ 0.29 $ 0.02 $ 0.27 $ 0.36 $ 0.06 $ 0.30
DIVIDENDS DECLARED PER COMMON SHARE $ 0.16 $ -- $ 0.16 $ 0.16 $ -- $ 0.16
Return on average assets 1.03% 0.07% 0.96% 1.36% 0.25% 1.11%
Return on average shareholders' equity 12.9% 0.90% 12.0% 16.0% 2.90% 13.1%
Net interest margin 3.62% 0.00% 3.62% 3.69% 0.00% 3.69%
Efficiency ratio 71.5% 0.00% 71.5% 68.6% 0.00% 68.6%
Effective tax rate 23.5% 1.00% 22.5% 24.2% 2.90% 21.3%
NET INTEREST INCOME - FULLY TAXABLE
EQUIVALENT (FTE)
Net Interest Income $ 199,179 $ -- $ 199,179 $ 191,265 $ -- $ 191,265
Tax Equivalent Adjustment (2) 1,869 -- 1,869 1,096 -- 1,096
--------- ----------- --------- --------- ----------- ---------
NET INTEREST INCOME - FTE $ 201,048 $ -- $ 201,048 $ 192,361 $ -- $ 192,361
========= =========== ========= ========= =========== =========
2002 SECOND QUARTER 2002 FIRST QUARTER
----------------------------------- ------------------------------------
(in thousands, except per share amounts) Reported Adjust. (1) Operating Reported Adjust. (1) Operating
--------- ---------- --------- --------- ---------- ---------
NET INTEREST INCOME $ 180,261 $ -- $ 180,261 $ 178,869 $ 9,724 $ 169,145
Provision for loan and lease losses 49,876 -- 49,876 39,010 5,186 33,824
NET INTEREST INCOME AFTER
PROVISION FOR LOAN AND LEASE LOSSES 130,385 -- 130,385 139,859 4,538 135,321
Operating lease income 171,617 -- 171,617 176,034 -- 176,034
Service charges on deposit accounts 35,608 -- 35,608 38,815 4,248 34,567
Brokerage and insurance 17,677 2,710 14,967 18,792 4,205 14,587
Trust services 16,247 -- 16,247 15,501 405 15,096
Bank owned life insurance 10,722 -- 10,722 10,956 -- 10,956
Mortgage banking 7,835 -- 7,835 16,074 (79) 16,153
Other service charges and fees 10,529 -- 10,529 10,632 1,514 9,118
Gain on sale of Florida operations -- -- -- 182,470 182,470 --
Merchant Services gain -- -- -- -- -- --
Securities gains (losses) 966 -- 966 457 -- 457
Other 17,513 -- 17,513 12,802 340 12,462
--------- --------- --------- --------- --------- ---------
TOTAL NON-INTEREST INCOME 288,714 2,710 286,004 482,533 193,103 289,430
--------- --------- --------- --------- --------- ---------
Operating lease expense 131,695 -- 131,695 140,785 -- 140,785
Personnel costs 99,115 1,557 97,558 108,029 9,965 98,064
Equipment 16,659 51 16,608 16,949 1,367 15,582
Outside data processing and other services 16,592 -- 16,592 18,439 1,342 17,097
Net occupancy 14,504 114 14,390 16,989 2,468 14,521
Professional services 7,864 2 7,862 6,430 159 6,271
Marketing 7,231 12 7,219 7,003 (171) 7,174
Telecommunications 5,320 18 5,302 6,018 736 5,282
Printing and supplies 3,683 12 3,671 3,837 318 3,519
Franchise and other taxes 2,313 -- 2,313 2,328 2 2,326
Amortization of intangible assets 235 32 203 1,376 1,125 251
Restructuring Charges -- -- -- 56,184 56,184 --
Other 18,535 77 18,458 17,229 1,024 16,205
--------- --------- --------- --------- --------- ---------
TOTAL NON-INTEREST EXPENSE 323,746 1,875 321,871 401,596 74,519 327,077
--------- --------- --------- --------- --------- ---------
INCOME BEFORE INCOME TAXES 95,353 835 94,518 220,796 123,122 97,674
Income taxes 24,375 303 24,072 125,321 100,276 25,045
--------- --------- --------- --------- --------- ---------
NET INCOME $ 70,978 $ 532 $ 70,446 $ 95,475 $ 22,846 $ 72,629
========= ========= ========= ========= ========= =========
NET INCOME PER COMMON SHARE -- DILUTED $ 0.29 $ 0.01 $ 0.28 $ 0.38 $ 0.09 $ 0.29
DIVIDENDS DECLARED PER COMMON SHARE $ 0.16 $ -- $ 0.16 $ 0.16 $ -- $ 0.16
Return on average assets 1.15% 0.01% 1.14% 1.46% 0.29% 1.17%
Return on average shareholders' equity 12.6% 0.10% 12.5% 16.9% 4.30% 12.6%
Net interest margin 3.94% 0.00% 3.94% 3.53% -0.05% 3.58%
Efficiency ratio 69.0% 0.00% 69.0% 71.7% 0.50% 71.2%
Effective tax rate 25.6% 0.10% 25.5% 56.8% 31.20% 25.6%
NET INTEREST INCOME - FULLY TAXABLE
EQUIVALENT (FTE)
Net Interest Income $ 180,261 $ -- $ 180,261 $ 178,869 $ 9,724 $ 169,145
Tax Equivalent Adjustment (2) 1,071 -- 1,071 1,169 -- 1,169
--------- --------- --------- --------- --------- ---------
NET INTEREST INCOME - FTE $ 181,332 $ -- $ 181,332 $ 180,038 $ 9,724 $ 170,314
========= ========= ========= ========= ========= =========
|
(1) See page 52 for definition of adjustments.
(2) Calculated assuming a 35% tax rate.
2001 FOURTH QUARTER 2001 THIRD QUARTER
-------------------------------------- ------------------------------------
(in thousands, except per share amounts) Reported Adjust. (1) Operating Reported Adjust. (1) Operating
--------- ----------- --------- -------- ----------- ---------
NET INTEREST INCOME $ 188,035 $ 19,692 $168,343 $179,078 $ 19,325 $159,753
Provision for loan and lease losses 101,075 53,994 47,081 34,053 3,532 30,521
--------- ----------- -------- -------- ----------- --------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN AND LEASE LOSSES 86,960 (34,302) 121,262 145,025 15,793 129,232
--------- ----------- -------- -------- ----------- --------
Operating lease income 178,588 -- 178,588 181,851 -- 181,851
Service charges on deposit accounts 43,025 7,533 35,492 41,966 8,126 33,840
Brokerage and insurance 20,966 5,900 15,066 19,912 5,969 13,943
Trust services 15,321 642 14,679 15,485 669 14,816
Bank owned life insurance 11,001 -- 11,001 11,001 -- 11,001
Mortgage banking 14,082 719 13,363 13,308 757 12,551
Other service charges and fees 12,552 2,970 9,582 12,350 2,803 9,547
Gain on sale of Florida operations -- -- -- -- -- --
Merchant Services gain -- -- -- -- -- --
Securities gains (losses) 89 -- 89 1,059 -- 1,059
Other 16,005 953 15,052 15,533 1,033 14,500
--------- ----------- -------- -------- ----------- --------
TOTAL NON-INTEREST INCOME 311,629 18,717 292,912 312,465 19,357 293,108
--------- ----------- -------- -------- ----------- --------
Operating lease expense 140,575 -- 140,575 138,538 -- 138,538
Personnel costs 111,306 18,067 93,239 115,335 18,901 96,434
Equipment 20,593 2,476 18,117 20,151 2,571 17,580
Outside data processing and other services 17,992 2,578 15,414 17,375 2,725 14,650
Net occupancy 19,766 4,699 15,067 19,082 4,785 14,297
Professional services 12,321 166 12,155 6,863 158 6,705
Marketing 6,345 1,040 5,305 6,921 1,204 5,717
Telecommunications 6,793 1,146 5,647 6,859 1,131 5,728
Printing and supplies 4,293 782 3,511 4,450 757 3,693
Franchise and other taxes 2,893 8 2,885 2,470 31 2,439
Amortization of intangible assets 10,100 7,545 2,555 10,114 7,545 2,569
Restructuring Charges 15,143 15,143 -- 50,817 50,817 --
Other 16,083 1,418 14,665 25,648 2,028 23,620
--------- ----------- -------- -------- ----------- --------
TOTAL NON-INTEREST EXPENSE 384,203 55,068 329,135 424,623 92,653 331,970
--------- ----------- -------- -------- ----------- --------
INCOME BEFORE INCOME TAXES 14,386 (70,653) 85,039 32,867 (57,503) 90,370
Income taxes (40,657) (56,717) 16,060 886 (19,239) 20,125
--------- ----------- -------- -------- ----------- --------
NET INCOME $ 55,043 $ (13,936) $ 68,979 $ 31,981 $ (38,264) $ 70,245
========= =========== ======== ======== =========== ========
NET INCOME PER COMMON SHARE -- DILUTED $ 0.22 $ (0.05) $ 0.27 $ 0.13 $ (0.15) $ 0.28
DIVIDENDS DECLARED PER COMMON SHARE $ 0.16 $ -- $ 0.16 $ 0.16 $ -- $ 0.16
Return on average assets 0.78% -0.34% 1.12% 0.45% -0.68% 1.13%
Return on average shareholders' equity 9.5% -2.40% 11.9% 5.5% -6.50% 12.0%
Net interest margin 3.46% -0.08% 3.54% 3.30% -0.05% 3.35%
Efficiency ratio 71.7% 1.10% 70.6% 73.9% 1.20% 72.7%
Effective tax rate -282.6% -301.50% 18.9% 2.7% -19.60% 22.3%
NET INTEREST INCOME - FULLY TAXABLE
EQUIVALENT (FTE)
Net Interest Income $ 188,035 $ 19,692 $168,343 $179,078 $ 19,325 $159,753
Tax Equivalent Adjustment (2) 1,292 -- 1,292 1,442 -- 1,442
--------- ----------- -------- -------- ----------- --------
NET INTEREST INCOME - FTE $ 189,327 $ 19,692 $169,635 $180,520 $ 19,325 $161,195
========= =========== ======== ======== =========== ========
2001 SECOND QUARTER 2001 FIRST QUARTER
-------------------------------------- ------------------------------------
(in thousands, except per share amounts) Reported Adjust. (1) Operating Reported Adjust. (1) Operating
--------- ----------- --------- -------- ----------- ---------
NET INTEREST INCOME $ 177,254 $ 22,150 $155,104 $170,921 $ 21,106 $149,815
Provision for loan and lease losses 99,444 69,039 30,405 22,754 3,755 18,999
--------- ----------- -------- -------- ----------- --------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN AND LEASE LOSSES 77,810 (46,889) 124,699 148,167 17,351 130,816
--------- ----------- -------- -------- ----------- --------
Operating lease income 174,151 -- 174,151 157,143 -- 157,143
Service charges on deposit accounts 40,902 8,023 32,879 39,119 7,764 31,355
Brokerage and insurance 19,388 6,203 13,185 18,768 6,536 12,232
Trust services 15,178 747 14,431 14,314 644 13,670
Bank owned life insurance 9,561 -- 9,561 9,560 -- 9,560
Mortgage banking 18,168 1,061 17,107 8,960 793 8,167
Other service charges and fees 12,217 2,834 9,383 11,098 2,683 8,415
Gain on sale of Florida operations -- -- -- -- -- --
Merchant Services gain -- -- -- -- -- --
Securities gains (losses) (2,503) (5,250) 2,747 2,078 -- 2,078
Other 14,619 977 13,642 13,127 653 12,474
--------- ----------- -------- -------- ----------- --------
TOTAL NON-INTEREST INCOME 301,681 14,595 287,086 274,167 19,073 255,094
--------- ----------- -------- -------- ----------- --------
Operating lease expense 158,437 -- 158,437 121,076 -- 121,076
Personnel costs 116,048 18,361 97,687 111,521 18,366 93,155
Equipment 19,844 2,481 17,363 19,972 2,469 17,503
Outside data processing and other services 17,671 2,571 15,100 16,654 2,532 14,122
Net occupancy 18,004 4,433 13,571 19,597 4,212 15,385
Professional services 7,714 282 7,432 5,964 176 5,788
Marketing 7,852 1,045 6,807 9,939 1,107 8,832
Telecommunications 7,207 1,243 5,964 7,125 1,173 5,952
Printing and supplies 4,565 877 3,688 5,059 961 4,098
Franchise and other taxes 2,246 17 2,229 2,120 4 2,116
Amortization of intangible assets 10,435 7,545 2,890 10,576 7,545 3,031
Restructuring Charges 13,997 13,997 -- -- -- --
Other 6,887 1,998 4,889 33,091 1,728 31,363
--------- ----------- -------- -------- ----------- --------
TOTAL NON-INTEREST EXPENSE 390,907 54,850 336,057 362,694 40,273 322,421
--------- ----------- -------- -------- ----------- --------
INCOME BEFORE INCOME TAXES (11,416) (87,144) 75,728 59,640 (3,849) 63,489
Income taxes (12,548) (31,156) 18,608 13,000 (260) 13,260
--------- ----------- -------- -------- ----------- --------
NET INCOME $ 1,132 $ (55,988) $ 57,120 $ 46,640 $ (3,589) $ 50,229
========= =========== ======== ======== =========== ========
NET INCOME PER COMMON SHARE -- DILUTED $ -- $ (0.23) $ 0.23 $ 0.19 $ (0.01) $ 0.20
DIVIDENDS DECLARED PER COMMON SHARE $ 0.20 $ -- $ 0.20 $ 0.20 $ -- $ 0.20
Return on average assets 0.02% -0.89% 0.91% 0.67% -0.14% 0.81%
Return on average shareholders' equity 0.2% -9.50% 9.7% 8.1% -0.60% 8.7%
Net interest margin 3.25% 0.03% 3.22% 3.19% 0.05% 3.14%
Efficiency ratio 75.9% 0.40% 75.5% 79.1% 0.20% 78.9%
Effective tax rate 109.9% 85.30% 24.6% 21.8% 0.90% 20.9%
NET INTEREST INCOME - FULLY TAXABLE
EQUIVALENT (FTE)
Net Interest Income $ 177,254 $ 22,150 $155,104 $170,921 $ 21,106 $149,815
Tax Equivalent Adjustment (2) 1,616 -- 1,616 2,002 -- 2,002
--------- ----------- -------- -------- ----------- --------
NET INTEREST INCOME - FTE $ 178,870 $ 22,150 $156,720 $172,923 $ 21,106 $151,817
========= =========== ======== ======== =========== ========
|
(1) See page 52 for definition of adjustments.
(2) Calculated assuming a 35% tax rate.
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
Information required by this item is set forth in Item 7 on pages 39 through
43 under the caption "Interest Rate Risk Management" and "Liquidity."
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA
REPORT OF MANAGEMENT
The management of Huntington is responsible for the financial information
and representations contained in the consolidated financial statements and other
sections of this report. The consolidated financial statements have been prepared
in conformity with accounting principles generally accepted in the United States.
In all material respects, they reflect the substance of transactions that should
be included based on informed judgments, estimates, and currently available
information.
Huntington maintains accounting and other control systems that, in the opinion
of management, provide reasonable assurance that (1) transactions are properly
authorized, (2) that the assets are properly safeguarded, and (3) transactions
are properly recorded and reported to permit the preparation of the financial
statements in conformity with accounting principles generally accepted in the
United States. The systems of internal accounting controls include the careful
selection and training of qualified personnel, appropriate segregation of responsibilities,
communication of written policies and procedures, and a broad program of internal
audits. The costs of the controls are balanced against the expected benefits.
During 2002, the Audit/Risk Committee of the Board of Directors met regularly
with management, Huntington's internal auditors, and the independent auditors,
Ernst & Young LLP, to review the scope of the audits and to discuss the
evaluation of internal accounting controls and financial reporting matters.
The independent and internal auditors have free access to and meet confidentially
with the Audit Committee to discuss appropriate matters. Also during 2002, Huntington
formed a Disclosure Review Committee. This committee's purpose is to design
and maintain disclosure controls and procedures to ensure that material information
relating to the financial and operating condition of Huntington is properly
reported to its chief executive officer, chief financial officer, internal auditors,
and the Audit/Risk Committee of the Board of Directors in connection with the
preparation and filing of periodic reports and the certification of those reports
by the chief executive officer and the chief financial officer.
The independent auditors are responsible for expressing an informed judgment
as to whether the consolidated financial statements present fairly, in accordance
with accounting principles generally accepted in the United States, the financial
position, results of operations, and cash flows of Huntington. They obtained
an understanding of Huntington's internal accounting controls and conducted
such tests and related procedures as they deemed necessary to provide reasonable
assurance, giving due consideration to materiality, that the consolidated financial
statements contain neither misleading nor erroneous data.
/s/ THOMAS E. HOAGLIN
Thomas E. Hoaglin
Chairman, President and Chief Executive Officer
/s/ MICHAEL J. MCMENNAMIN
Michael J. McMennamin
Vice Chairman, Chief Financial Officer, and
Treasurer
|
INDEPENDENT AUDITOR'S REPORT
Report of Ernst & Young LLP, Independent Auditors
To the Board of Directors and Shareholders, Huntington Bancshares
Incorporated
We have audited the accompanying consolidated balance sheets of Huntington
Bancshares Incorporated and Subsidiaries as of December 31, 2002 and 2001, and
the related consolidated statements of income, changes in shareholders' equity,
and cash flows for each of the three years in the period ended December 31,
2002. These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Huntington
Bancshares Incorporated and Subsidiaries at December 31, 2002 and 2001, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 2002, in conformity with accounting
principles generally accepted in the United States.
As discussed in Notes 3 and 4 to the consolidated financial statements, Huntington
Bancshares Incorporated and Subsidiaries has restated previously issued 2000,
2001, and 2002 consolidated financial statements.
As discussed in Note 15 to the consolidated financial statements, Huntington
Bancshares Incorporated and Subsidiaries changed its method of accounting for
amortization of goodwill in 2002 in accordance with FASB Statement No. 142,
Goodwill and Other Intangible Assets.
/s/ ERNST & YOUNG LLP
Columbus, Ohio
January 16, 2003, except for Note 3
as to which the date is May 19, 2003
and Note 4 as to which the date is November 13, 2003
|
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
----------------------------
(in thousands of dollars, except share amounts) 2002 2001
------------ ------------
(RESTATED) (RESTATED)
ASSETS
Cash and due from banks $ 969,483 $ 1,138,366
Federal funds sold and securities purchased under resale agreements 49,280 83,275
Interest bearing deposits in banks 37,300 21,205
Trading account securities 241 13,392
Mortgage loans held for sale 528,379 629,386
Securities available for sale - at fair value 3,403,369 2,849,579
Investment securities - fair value $7,725 and $12,499, respectively 7,546 12,322
Loans and leases:
Commercial loans 5,608,443 6,442,270
Commercial real estate 3,728,850 3,817,191
Consumer
Automobile loans and direct financing leases 3,915,553 2,959,933
Home equity 3,198,487 3,580,106
Residential mortgage 1,740,319 1,123,682
Other consumer loans 395,751 544,737
------------ ------------
Total loans and direct financing leases 18,587,403 18,467,919
Less allowance for loan and lease losses 336,648 369,332
------------ ------------
Net loans and direct financing leases 18,250,755 18,098,587
------------ ------------
Operating lease assets 2,200,525 3,005,848
Bank owned life insurance 886,214 846,065
Premises and equipment 341,366 452,036
Goodwill and other intangible assets 218,567 716,054
Customers' acceptance liability 16,745 13,670
Accrued income and other assets 522,611 537,160
------------ ------------
TOTAL ASSETS $ 27,432,381 $ 28,416,945
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Demand deposits
Non-interest bearing $ 3,073,869 $ 3,635,173
Interest bearing 5,374,095 5,723,160
Savings deposits 2,851,158 3,466,305
Other domestic time deposits 3,956,306 5,868,451
Domestic time deposits of $100,000 or more 731,959 1,130,563
Brokered time deposits and negotiable CDs 1,092,754 137,915
Foreign time deposits 419,185 225,737
------------ ------------
Total deposits 17,499,326 20,187,304
------------ ------------
Short-term borrowings 2,541,016 1,955,926
Bank acceptances outstanding 16,745 13,670
Medium-term notes 2,045,123 1,795,002
Federal Home Loan Bank advances 1,013,000 17,000
Subordinated notes and other long-term debt 788,678 927,330
Company obligated mandatorily redeemable preferred capital securities of subsidiary
trusts holding solely junior subordinated debentures of the parent company 300,000 300,000
Accrued expenses and other liabilities 1,038,700 878,816
------------ ------------
TOTAL LIABILITIES 25,242,588 26,075,048
============ ============
Shareholders' equity
Preferred stock - authorized 6,617,808 shares; none outstanding -- --
Common stock - without par value; authorized 500,000,000 shares; issued
257,866,255 shares; outstanding 232,878,851 and 251,193,814 shares, respectively 2,484,421 2,490,724
Less 24,987,404 and 6,672,441 treasury shares, respectively (475,399) (123,849)
Accumulated other comprehensive income 62,300 25,488
Retained earnings (deficit) 118,471 (50,466)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 2,189,793 2,341,897
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 27,432,381 $ 28,416,945
============ ============
|
See notes to consolidated financial statements.
Consolidated Income Statements
TWELVE MONTHS ENDED DECEMBER 31,
----------------------------------------------
(in thousands, except per share amounts) 2002 2001 2000
------------- ------------- -------------
(RESTATED) (RESTATED) (RESTATED)
Interest and fee income
Loans and direct financing leases $ 1,090,907 $ 1,407,581 $ 1,533,137
Securities 179,623 216,215 284,719
Other 22,665 30,993 15,532
------------- ------------- -------------
TOTAL INTEREST INCOME 1,293,195 1,654,789 1,833,388
------------- ------------- -------------
Interest expense
Deposits 385,733 654,056 779,281
Short-term borrowings 42,720 95,859 113,134
Medium-term notes 61,727 121,701 189,311
Federal Home Loan Bank advances 5,574 1,174 824
Subordinated notes, capital notes, and other long-term debt 47,867 66,711 80,728
------------- ------------- -------------
TOTAL INTEREST EXPENSE 543,621 939,501 1,163,278
------------- ------------- -------------
NET INTEREST INCOME 749,574 715,288 670,110
Provision for loan and lease losses 194,426 257,326 61,464
------------- ------------- -------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN AND LEASE LOSSES 555,148 457,962 608,646
------------- ------------- -------------
Non-Interest income
Operating lease income 657,074 691,733 623,835
Service charges on deposit accounts 153,564 165,012 161,426
Brokerage and insurance 66,843 79,034 61,871
Trust services 62,051 60,298 53,613
Mortgage banking 32,033 54,518 32,772
Bank owned life insurance 43,123 41,123 39,544
Other service charges and fees 42,888 48,217 43,883
Gain on sale of Florida operations 182,470 -- --
Merchant Services gain 24,550 -- --
Securities gains 4,902 723 37,101
Other 72,206 59,284 69,157
------------- ------------- -------------
TOTAL NON-INTEREST INCOME 1,341,704 1,199,942 1,123,202
------------- ------------- -------------
Non-Interest expense
Operating lease expense 518,970 558,626 494,800
Personnel costs 418,037 454,210 396,230
Equipment 68,323 80,560 78,069
Outside data processing and other services 67,368 69,692 62,011
Net occupancy 59,539 76,449 75,197
Marketing 27,911 31,057 34,884
Professional services 33,085 32,862 22,721
Telecommunications 22,661 27,984 26,225
Printing and supplies 15,198 18,367 19,634
Franchise and other taxes 9,456 9,729 11,077
Amortization of intangible assets 2,019 41,225 39,207
Restructuring charges 48,973 79,957 --
Other 82,607 81,709 23,076
------------- ------------- -------------
TOTAL NON-INTEREST EXPENSE 1,374,147 1,562,427 1,283,131
------------- ------------- -------------
INCOME BEFORE INCOME TAXES 522,705 95,477 448,717
Income taxes 198,974 (39,319) 126,299
------------- ------------- -------------
NET INCOME $ 323,731 $ 134,796 $ 322,418
============= ============= =============
PER COMMON SHARE
Net Income
Basic $ 1.34 $ 0.54 $ 1.30
Diluted $ 1.33 $ 0.54 $ 1.29
Cash dividends declared $ 0.64 $ 0.72 $ 0.76
AVERAGE COMMON SHARES OUTSTANDING
Basic 242,279 251,078 248,709
Diluted 244,012 251,716 249,570
|
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS'
EQUITY
PREFERRED COMMON TREASURY
----------------- ----------------------- --------------------------
(in thousands of dollars, except per share amounts) SHARES STOCK SHARES STOCK SHARES STOCK
------ ------- --------- ----------- ----------- -----------
BALANCE -- JANUARY 1, 2000 -- $ -- 233,845 $ 2,284,956 (4,957) $ (137,268)
Cumulative effect of restatements (See Notes 3 and 4)
------ ------- --------- ----------- ----------- -----------
BALANCE -- JANUARY 1, 2000, RESTATED -- $ -- 233,845 $ 2,284,956 (4,957) $ (137,268)
------ ------- --------- ----------- ----------- -----------
Comprehensive Income:
Net income
Unrealized net holding gains on securities
available for sale arising during the period,
net of reclassification adjustment for net
gains included in net income
Total comprehensive income
Stock issued for acquisitions (29,391) 7,175 171,781
Cash dividends declared ($0.76 per share)
Stock options exercised (3,395) 115 3,751
10% stock dividend 24,021 241,483 (1,182)
Treasury shares purchased (8,188) (168,395)
Treasury shares sold to employee benefit plans 30 699
------ ------- --------- ----------- ----------- -----------
BALANCE -- DECEMBER 31, 2000 -- -- 257,866 2,493,645 (7,007) (129,432)
------ ------- --------- ----------- ----------- -----------
Comprehensive Income:
Net income
Cumulative effect of change in accounting
principle for derivatives
Unrealized net holding gains on securities
available for sale arising during the period,
net of reclassification adjustment for net
gains included in net income
Unrealized gains on derivative instruments
used in cash flow hedging relationships
Total comprehensive income
Cash dividends declared ($0.72 per share)
Stock options exercised (2,921) 264 4,378
Treasury shares sold to employee benefit plans 71 1,205
------ ------- --------- ----------- ----------- -----------
BALANCE -- DECEMBER 31, 2001 -- -- 257,866 2,490,724 (6,672) (123,849)
------ ------- --------- ----------- ----------- -----------
COMPREHENSIVE INCOME:
Net income
Unrealized net holding gains on securities
available for sale arising during the period,
net of reclassification adjustment for net
gains included in net income
Unrealized gains on derivative instruments
used in cash flow hedging relationships
Minimum pension liability
Total comprehensive income
Stock issued for acquisitions (838) 1,038 19,989
Cash dividends declared ($0.64 per share)
Stock options exercised (3,545) 373 6,757
Treasury shares purchased (19,161) (370,012)
Other (1,920) (565) (8,284)
------ ------- --------- ----------- ----------- -----------
Balance -- December 31, 2002 -- $ -- 257,866 $ 2,484,421 (24,987) $ (475,399)
====== ======= ========= =========== =========== ===========
ACCUMULATED
OTHER RETAINED
COMPREHENSIVE EARNINGS
(in thousands of dollars, except per share amounts) INCOME (DEFICIT) TOTAL
------------- ----------- -----------
(RESTATED) (RESTATED)
BALANCE -- JANUARY 1, 2000 $ (94,093) $ 128,761 $ 2,182,356
Cumulative effect of restatements (See Notes 3 and 4) (24,790) (24,790)
----------- ----------- -----------
BALANCE -- JANUARY 1, 2000, RESTATED $ (94,093) $ 103,971 $ 2,157,566
----------- ----------- -----------
Comprehensive Income:
Net income 322,418 322,418
Unrealized net holding gains on securities
available for sale arising during the period,
net of reclassification adjustment for net
gains included in net income 69,573 69,573
-----------
Total comprehensive income 391,991
-----------
Stock issued for acquisitions 142,382
Cash dividends declared ($0.76 per share) (189,191) (189,191)
Stock options exercised 356
10% stock dividend (241,662) (179)
Treasury shares purchased (168,395)
Treasury shares sold to employee benefit plans 699
----------- ----------- -----------
BALANCE -- DECEMBER 31, 2000 (24,520) (4,464) 2,335,229
----------- ----------- -----------
Comprehensive Income:
Net income 134,796 134,796
Cumulative effect of change in accounting
principle for derivatives (9,113) (9,113)
Unrealized net holding gains on securities
available for sale arising during the period,
net of reclassification adjustment for net
gains included in net income 53,989 53,989
Unrealized gains on derivative instruments
used in cash flow hedging relationships 5,132 5,132
-----------
Total comprehensive income 184,804
-----------
Cash dividends declared ($0.72 per share) (180,798) (180,798)
Stock options exercised 1,457
Treasury shares sold to employee benefit plans 1,205
----------- ----------- -----------
BALANCE -- DECEMBER 31, 2001 25,488 (50,466) 2,341,897
----------- ----------- -----------
COMPREHENSIVE INCOME:
NET INCOME 323,731 323,731
UNREALIZED NET HOLDING GAINS ON SECURITIES
AVAILABLE FOR SALE ARISING DURING THE PERIOD,
NET OF RECLASSIFICATION ADJUSTMENT FOR NET
GAINS INCLUDED IN NET INCOME 27,387 27,387
UNREALIZED GAINS ON DERIVATIVE INSTRUMENTS
USED IN CASH FLOW HEDGING RELATIONSHIPS 9,620 9,620
MINIMUM PENSION LIABILITY (195) (195)
-----------
TOTAL COMPREHENSIVE INCOME 360,543
-----------
STOCK ISSUED FOR ACQUISITIONS 19,151
CASH DIVIDENDS DECLARED ($0.64 PER SHARE) (154,794) (154,794)
STOCK OPTIONS EXERCISED 3,212
TREASURY SHARES PURCHASED (370,012)
OTHER (10,204)
----------- ----------- -----------
BALANCE -- DECEMBER 31, 2002 $ 62,300 $ 118,471 $ 2,189,793
=========== =========== ===========
|
See notes to consolidated financial statements.
66
CONSOLIDATED STATEMENTS OF CASH FLOWS
TWELVE MONTHS ENDED DECEMBER 31,
------------------------------------------------
(in thousands of dollars) 2002 2001 2000
------------ ------------ ------------
(RESTATED) (RESTATED) (RESTATED)
OPERATING ACTIVITIES
Net Income $ 323,731 $ 134,796 $ 322,418
Adjustments to reconcile net income to net cash
provided by operating activities
Provision for loan and lease losses 194,426 257,326 61,464
Depreciation on operating lease assets 435,822 468,739 417,707
Other depreciation and amortization 58,132 101,233 110,908
Deferred income tax expense 96,718 91,598 233,423
Decrease (increase) in trading account securities 13,151 (8,669) 3,252
Decrease (increase) in mortgages held for sale 101,007 (474,282) (13,381)
Gains on sales of securities available for sale (4,902) (723) (37,101)
Gains on sales/securitizations of loans (11,031) (9,464) (9,561)
Gain on sale of Florida banking and insurance operations (182,470) -- --
Merchant Services gain (24,550) -- --
Restructuring and special charges 48,973 79,957 --
Other, net (18,946) (143,505) (85,293)
------------ ------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,030,061 497,006 1,003,836
------------ ------------ ------------
INVESTING ACTIVITIES
(Increase) decrease in interest bearing deposits in banks (16,095) (16,235) 1,588
Proceeds from:
Maturities and calls of investment securities 4,771 4,009 2,408
Maturities and calls of securities available for sale 1,031,935 1,021,766 415,571
Sales of securities available for sale 855,309 1,410,304 1,758,473
Purchases of securities available for sale (1,959,137) (1,056,840) (239,084)
Proceeds from sales/securitizations of loans 465,699 514,897 1,556,093
Net loan and direct financing lease originations, excluding sales (3,867,300) (1,605,519) (1,873,825)
Net decrease (increase) in operating lease assets 369,501 (540,094) (784,578)
Proceeds from sale of premises and equipment 19,390 3,714 3,504
Purchases of premises and equipment (57,761) (63,177) (65,160)
Proceeds from sales of other real estate 13,112 15,733 13,766
Net cash (paid) received in purchase acquisitions (8,305) -- 12,004
Proceeds from restructuring of Huntington Merchant Services, LLC 27,000 -- --
Net cash paid related to sale of Florida banking
and insurance operations (1,277,767) -- --
------------ ------------ ------------
NET CASH (USED FOR) PROVIDED BY INVESTING ACTIVITIES (4,399,648) (311,442) 800,760
------------ ------------ ------------
FINANCING ACTIVITIES
Increase (decrease) in total deposits 2,073,891 423,157 (443,921)
Increase (decrease) in short-term borrowings 537,770 (31,833) (144,230)
Proceeds from issuance of medium-term notes 1,025,000 665,000 580,000
Payment of medium-term notes (782,150) (1,330,000) (1,367,000)
Proceeds from Federal Home Loan Bank advances 1,000,000 -- --
Maturity of Federal Home Loan Bank advances (4,000) (8,000) --
Proceeds from issuance of long-term debt -- 50,000 150,000
Maturity of long-term debt (150,000) -- --
Dividends paid on common stock (167,002) (190,792) (185,103)
Repurchases of common stock (370,012) -- (168,395)
Net proceeds from issuance of common stock 3,212 2,662 1,055
------------ ------------ ------------
NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES 3,166,709 (419,806) (1,577,594)
------------ ------------ ------------
CHANGE IN CASH AND CASH EQUIVALENTS (202,878) (234,242) 227,002
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,221,641 1,455,883 1,228,881
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,018,763 $ 1,221,641 $ 1,455,883
============ ============ ============
SUPPLEMENTAL DISCLOSURES
Income taxes paid $ 70,463 $ 175 $ 1,210
Interest paid 560,731 986,108 1,175,613
Non-cash activities:
Mortgage loans securitized 386,385 -- 780,998
Stock issued for purchase acquisitions 19,151 -- 142,382
|
See notes to consolidated financial statements.
67
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED)
1. SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS: Huntington Bancshares Incorporated (Huntington) is a
multi-state diversified financial services company organized under Maryland
law in 1966 and headquartered in Columbus, Ohio. Through its subsidiaries, Huntington
is engaged in providing full-service commercial and consumer banking services,
mortgage banking services, automobile financing, equipment leasing, investment
management, trust services, and discount brokerage services, as well as underwriting
credit life and disability insurance, and selling other insurance and financial
products and services. Huntington's banking offices are located in Ohio, Michigan,
Indiana, Kentucky, and West Virginia. Selected financial services are also conducted
in other states including Arizona, Florida, Georgia, Maryland, New Jersey, Pennsylvania,
and Tennessee. Huntington also has a foreign office in the Cayman Islands and
a foreign office in Hong Kong. Huntington (the parent company) is a financial
holding company and a bank holding company.
BASIS OF PRESENTATION: The consolidated financial statements include the accounts
of the parent company, and its majority-owned subsidiaries and are presented
in conformity with accounting principles generally accepted in the United States
(GAAP). All significant intercompany accounts and transactions have been eliminated
in consolidation. Other subsidiaries and affiliates are accounted for by the
equity method where there is control and Huntington owns 50% or greater ownership
interest. The cost method is generally used where there is no control and Huntington
owns less than a 50% ownership interest. These assets that are accounted for
by either the equity or cost method are included in other assets in Huntington's
statement of financial condition.
The preparation of financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect amounts reported in the financial
statements. Actual results could differ from those estimates. Certain prior
period amounts have been reclassified to conform to the current year's presentation.
SECURITIES: Securities purchased with the intention of recognizing short-term
profits are classified as trading account securities and reported at fair value.
The unrealized gains or losses on trading securities are recorded in other non-interest
income. Debt securities that Huntington has both the positive intent and ability
to hold to maturity are classified as investment securities and are reported
at amortized cost. Securities not classified as trading or investments are designated
available for sale and reported at fair value. Unrealized gains or losses on
securities available for sale are reported as a separate component of accumulated
other comprehensive income in shareholders' equity. Declines in the value of
debt and marketable equity securities that are considered other than temporary
are recorded in non-interest income as a loss on securities available for sale.
Nonmarketable equity securities include stock acquired for regulatory purposes,
such as Federal Home Loan Bank stock and Federal Reserve Bank stock. These securities
are generally accounted for at cost and are included in securities available
for sale.
The amortized cost of specific securities sold is used to compute realized
gains and losses. Interest and dividends on securities, including amortization
of premiums and accretion of discounts using the effective interest method over
the period to maturity, are included in interest income.
LOANS AND LEASES: Loans and direct financing leases are reported net of unearned
income at the principal amounts outstanding. Interest income is accrued as earned
based on unpaid principal balances. Huntington defers the fees it receives from
loan and lease origination activities, as well as the costs of those activities,
and amortizes these fees and costs over the estimated lives of the related loans
and leases as a yield adjustment.
Automobile loans and leases include loans secured by automobiles and leases
of automobiles that qualify for the direct financing method of accounting. Leases
qualify for the direct financing accounting method if the present values of
the lease payments and the guaranteed residual value are at least 90% of the
cost of the vehicle. Huntington records the residual values of its leases based
on estimated future market values of the automobiles as published in the Black
Book. Beginning in October 2000, Huntington purchased residual value insurance
for its entire lease portfolio to mitigate the risk of declines in residual
values. The insurance provides first dollar loss coverage on the portfolio of
existing automobile leases at October 1, 2000 and has a cap on insured losses
of $120 million. Insured losses on new lease originations from October 2000
through April 2002 have a cap of $50 million. There is no cap for insured losses
with the policy covering new automobile lease originations from May 2002 through
April 2005 (the "New Policy"). The New Policy is subject to renewal
in April 2005. Leases covered by the New Policy, as amended, are qualified for
the direct financing method of accounting. Leases covered by the earlier policies
are accounted for using the operating method of accounting and are recorded
as operating lease assets in Huntington's balance sheet.
Residual value losses arise if the market value at the end of the lease term
is less than the residual value embedded in the original lease contract. Huntington's
insurance covers the difference between the recorded residual value and the
fair value of the automobile at the end of the lease term as evidenced by Black
Book valuations. This insurance, however, does not cover residual losses below
Black Book value, which may arise when the automobile has excess wear and tear
and/or excess mileage, not reimbursed by the lessee.
Commercial loans and commercial loans secured by real estate are generally
placed on non-accrual status and stop accruing interest when principal or interest
payments are 90 days or more past due or the borrower's creditworthiness is
in doubt. A loan may remain in accruing status when it is sufficiently collateralized,
which means the collateral covers the full repayment of principal and interest,
and is in the process of active collection.
Commercial and commercial real estate loans are evaluated for impairment in
accordance with the provisions of Statement of Financial Accounting Standards
(Statement) No. 114, Accounting by Creditors for Impairment of a Loan. This
Statement requires an allowance to be established as a component of the allowance
for loan and lease losses when it is probable that all amounts due pursuant
to the contractual terms of the loan or lease will not be collected and the
recorded investment in the loan or lease exceeds its fair value. Fair value
is measured using either the present value of expected future cash flows discounted
at the loan's or lease's effective interest rate, the observable market price
of the loan or lease, or the fair value of the collateral if the loan or lease
is collateral dependent. All loans and leases considered impaired are included
in non-performing assets.
Consumer loans and leases, excluding residential mortgage loans, are subject
to mandatory charge-off at a specified delinquency date and are not classified
as non-performing prior to being charged off. These loans and leases are generally
charged off in full no later than when the loan or lease becomes 120 days past
due. Residential mortgage loans are placed on non-accrual status when principal
payments are 180 days past due or interest payments are 210 days past due. A
charge-off on a residential mortgage loan is recorded when the loan has been
foreclosed and the loan balance exceeds the fair value of the collateral. The
fair value of the collateral is then recorded as real estate owned and is reflected
in other assets in the consolidated statement of financial condition.
Huntington uses the cost recovery method in accounting for cash received on
non-performing loans and leases. Under this method, cash receipts are applied
entirely against principal until the loan or lease has been collected in full,
after which time any additional cash receipts are recognized as interest income.
When, in management's judgment, the borrower's ability to make periodic interest
and principal payments resumes and collectibility is no longer in doubt, the
loan or lease is returned to accrual status. When interest accruals are suspended,
accrued interest income is reversed with current year accruals charged to earnings
and prior year amounts generally charged off as a credit loss.
SECURITIZED LOANS: Securitized loans are accounted for in accordance with
Statement No. 140, Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities, which was fully adopted by Huntington in
2001. Asset securitization involves the sale of a pool of loan receivables,
generally to a trust, in exchange for funding collateralized by these loans.
The trust then sells undivided interests in the trust to investors, while Huntington
retains the remaining undivided interests, referred to as retained interest.
While the loans are removed from the balance sheet at the time of sale, this
retained interest is recorded as an asset based on its estimated fair value.
An asset is also established for the servicing of the loans sold, which is retained
at the time of sale, based on the fair value of the servicing rights. Gains
and losses on the loans sold, retained interest, and servicing rights associated
with loan securitizations are determined when the related loans are sold to
the trust. Fair values of the retained interests and servicing rights are based
on the present value of expected future cash flows from the underlying loans,
net of interest payments to security holders. The present value of expected
future cash flows is determined using assumptions for market interest rates,
loan losses, servicing costs, and prepayment rates. Management also uses these
assumptions to periodically assess the retained interests and servicing rights
for impairment. The retained interest is included in securities available for
sale and the servicing rights are recorded in other assets in the consolidated
balance sheets.
ALLOWANCE FOR LOAN AND LEASE LOSSES: The allowance for loan and lease losses
reflects management's judgment as to the level considered appropriate to absorb
inherent credit losses in the loan and lease portfolio. This judgment is based
on the size and current risk characteristics of the portfolio, a review of individual
loans and leases, historical and anticipated loss experience, and a review of
individual relationships where applicable. External influences such as general
economic conditions, economic conditions in the relevant geographic areas and
specific industries, regulatory guidelines, and other factors are also assessed
in determining the level of the allowance.
The allowance is determined subjectively, requiring significant estimates, including
the timing and amounts of expected future cash flows on impaired loans and leases,
consideration of current economic conditions and historical loss experience pertaining
to pools of homogeneous loans and leases, all of which may be susceptible to change.
The allowance is increased through a provision that is charged to earnings, based
on management's periodic evaluation of the factors previously mentioned and is
reduced by charge-offs, net of recoveries, and the allowance associated with securitized
or sold loans.
The allowance consists of an allocated portion and a small, unallocated portion.
The components of the allowance represent estimates developed pursuant to Statement
No. 5, Accounting for Contingencies, and Statement No. 114. The allocated portion
of the allowance reflects expected losses resulting from quantitative analyses
developed through historical loss experience and specific credit allocations
at the individual loan and lease level for commercial loans and commercial real
estate loans. The specific credit allocations are based on a continuous analysis
of all loans and leases by internal credit rating. The historical loss element
is determined using a loss migration analysis that examines both the probability
of default and the loss in the event of default by loan and lease category and
internal credit rating. The loss migration analysis is performed periodically
and loss factors are updated regularly based on actual experience. The portion
of the allowance allocated to homogeneous consumer loans and leases is also
determined by applying specific probability of default and loss in the event
of default factors to various segments of the loan and lease portfolio. Management's
determination of the amounts necessary for concentrations and changes in portfolio
mix are also included in the allocated component of the allowance. The unallocated
portion of the allowance is determined based on management's assessment of general
economic conditions, as well as specific economic conditions in the individual
markets in which Huntington operates. This determination inherently involves
a higher degree of subjectivity and considers current risk factors that may
not have yet manifested themselves in Huntington's historical loss factors used
to determine the allocated portion of the allowance.
RESELL AND REPURCHASE AGREEMENTS: Securities purchased under agreements to
resell and securities sold under agreements to repurchase are generally treated
as collateralized financing transactions and are recorded at the amounts at
which the securities were acquired or sold plus accrued interest. The fair value
of collateral either received from or provided to a third party is continually
monitored and additional collateral is obtained or is requested to be returned
to Huntington as deemed appropriate.
GOODWILL AND OTHER INTANGIBLE ASSETS: Under the purchase method of accounting,
the net assets of entities acquired by Huntington were recorded at their estimated
fair value at the date of acquisition. The excess of cost over the fair value
of net assets acquired is recorded as goodwill. Prior to 2002, goodwill was
amortized over periods generally up to 25 years. Effective January 1, 2002,
in accordance with Statement No. 142, goodwill is no longer amortized but is
reviewed by management, along with other intangible assets arising from business
combinations, for impairment quarterly or whenever a significant event occurs
that adversely affects operations or when changes in circumstances indicate
that the carrying value may not be recoverable. Other intangible assets are
amortized over their estimated useful lives.
MORTGAGE BANKING ACTIVITIES: Loans held for sale are primarily composed of
performing 1-to-4-family residential mortgage loans originated for resale and
are carried at the lower of cost (net of purchase discounts or premiums and
effects of hedge accounting) or fair value as determined on an aggregate basis.
Fair value is determined using available secondary market prices for loans with
similar coupons, maturities, and credit quality.
Huntington recognizes the rights to service mortgage loans as separate assets,
which are included in other assets in the consolidated balance sheets, only
when purchased or when servicing is contractually separated from the underlying
mortgage loans by sale or securitization of the loans with servicing rights
retained. The carrying value of loans sold or securitized is allocated between
loans and servicing rights based on the relative fair values of each. Purchased
mortgage servicing rights are initially recorded at cost. All servicing rights
are subsequently carried at the lower of the initial carrying value, adjusted
for amortization, or fair value. Servicing rights are evaluated for impairment
quarterly based on the fair value of those rights, using a disaggregated approach.
The fair value of the servicing rights is determined by estimating the present
value of future net cash flows, taking into consideration market loan prepayment
speeds, discount rates, servicing costs, and other economic factors. Servicing
rights are amortized over the period of and in proportion to the estimated future
net servicing revenue. Amortization is recorded as a reduction of servicing
income, which is reflected in non-interest income in Huntington's income statement.
As of December 31, 2002 and 2001, mortgage servicing assets, net of valuation
reserves, were $29.3 million and $35.3 million, respectively. At December 31,
2002 and 2001, valuation reserves representing the adjustment to fair value
were $21.1 million and $7.0 million, respectively. Impairment charges, which
are reflected in mortgage banking income, were $14.1 million in 2002, $6.3 million
in 2001, and $0.7 million in 2000.
PREMISES AND EQUIPMENT: Premises and equipment are stated at cost, less accumulated
depreciation and amortization. Depreciation is computed principally by the straight-line
method over the estimated useful lives of the related assets. Buildings and building
improvements are depreciated over an average of 30 to 40 years and 10 to 20 years,
respectively. Land improvements and furniture and fixtures are depreciated over
10 years while equipment is depreciated over a range of 3 to 7 years. Leasehold
improvements are amortized over the lesser of the asset life or term of the related
leases. Maintenance and repairs are charged to expense as incurred, while improvements
that extend the useful life of an asset are capitalized and depreciated over the
remaining useful life.
OPERATING LEASE ASSETS: Operating lease assets consist of automobiles leased
to customers, which are reported at cost, including net deferred origination
costs, less accumulated depreciation. Net deferred origination costs include
the referral payments Huntington makes to automobile dealers, which are deferred
and amortized on a straight-line basis over the life of the lease.
Lease payments are recorded as rental income, a component of Operating lease
income in the Non-interest income section of the Consolidated Income Statements.
Huntington records the fees it receives from the origination of operating leases,
and the costs of its origination efforts, in the period in which the fees are
received and the costs are incurred. Origination fees are recorded as Operating
lease income. Depreciation expense is recorded on a straight-line basis over
the term of the lease from the cost of the automobile at the inception of the
lease to the estimated residual value at the end of the lease term. Depreciation
expense is included in Operating lease expense in the Non-interest expense section
of the Consolidated Income Statement. Depreciation expense is adjusted prospectively
at any time during the lease term when the estimated market value of the automobile
at the end of the lease term changes. Upon disposition, a gain or loss is recorded
for any difference between the net book value of the lease and the proceeds
from the disposition of the automobile.
Credit losses occur when a lease is terminated early because the lessee cannot
make the required lease payments. These credit-generated terminations result
in Huntington taking possession of the automobile earlier than expected. When
this occurs, the market value of the automobile may be less than Huntington's
book value, resulting in a loss upon sale or write down to market value while
the vehicle is in inventory pending sale. Rental income payments accrued, but
not received, are written off when they reach 120 days past due and at that
time the asset is evaluated for impairment.
DERIVATIVE FINANCIAL INSTRUMENTS: Derivative financial instruments, primarily
interest rate swaps, are accounted for in accordance with Statement No. 133,
Accounting for Derivative Instruments and Hedging Activities, as amended. This
Statement requires every derivative instrument to be recorded in the consolidated
statement of condition as either an asset or liability measured at its fair
value and Huntington to formally document, designate, and assess the effectiveness
of transactions for which hedge accounting is applied. Depending on the nature
of the hedge and the extent to which it is effective, the changes in fair value
of the derivative recorded through earnings will either be offset against the
change in the fair value of the hedged item in earnings or recorded in comprehensive
income and subsequently recognized in earnings in the period the hedged item
affects earnings. The portion of a hedge that is ineffective and all changes
in the fair value of derivatives not designated as hedges, referred to as trading
instruments, are recognized immediately in earnings. Trading instruments are
carried at fair value with changes in fair value included in other Non-interest
income. Trading instruments are executed primarily with Huntington's customers
to fulfill their needs. Derivative instruments used for trading purposes include
interest rate swaps, including callable swaps, interest rate caps and floors,
and interest rate and foreign exchange futures, forwards and options.
Upon adoption in 2001 of Statement No. 133, as amended, Huntington designated
its portfolio of derivative financial instruments used for risk management purposes
into fair value or cash flow hedges. Derivatives used to hedge changes in fair
value of assets and liabilities due to changes in interest rates or other factors
were designated as fair value hedges and those used to hedge changes in forecasted
cash flows, due generally to interest rate risk, were designated as cash flow
hedges. The after-tax transition adjustment of adopting Statement No. 133, as
amended, was immaterial to net income and reduced other comprehensive income
(OCI) $9.1 million in 2001.
INCOME TAXES: Income taxes are accounted for under the asset and liability
method. Accordingly, deferred tax assets and liabilities are recognized for
the future book and tax consequences attributable to temporary differences between
the financial statement carrying amounts of existing assets and liabilities
and their respective tax bases. Deferred tax assets and liabilities are determined
using enacted tax rates expected to apply in the year in which those temporary
differences are expected to be recovered or settled. The effect on deferred
tax assets and liabilities of a change in tax rates is recognized in income
at the time of enactment of such change in tax rates.
TREASURY STOCK: Acquisitions of treasury stock are recorded at cost. Reissuance
of shares in treasury for acquisitions, stock option exercises, or for other
corporate purposes, is recorded at their weighted-average cost.
STOCK-BASED COMPENSATION: Huntington's stock-based compensation plans are accounted
for based on the intrinsic value method promulgated by Accounting Principles Board
Opinion 25, Accounting for Stock Issued to Employees, and related interpretations.
Compensation expense for employee stock options is generally not recognized if
the exercise price of the option equals or exceeds the fair value of the stock
on the date of grant. See Note 21 regarding pro forma disclosures for net income
and earnings per diluted common share is presented as if Huntington had applied
the fair value method of accounting of Statement No. 123, Accounting for Stock-Based
Compensation, in measuring compensation costs for stock options.
Huntington expects to adopt the fair value method of recording stock options
under the transitional guidance of Statement No. 148, Accounting for Stock-Based
Compensation--Transition and Disclosure. Huntington is currently evaluating
which of the three methods under transitional guidance it will adopt. See Note
2 for more information regarding this new standard.
SEGMENT RESULTS: Accounting policies for the lines of business are the same
as those used in the preparation of the consolidated financial statements with
respect to activities specifically attributable to each business line. However,
the preparation of business line results requires management to establish methodologies
to allocate funding costs and benefits, expenses, and other financial elements
to each line of business. Changes are made in these methodologies utilized for
certain balance sheet and income statement allocations performed by Huntington's
management reporting system, as appropriate. Prior periods are not restated
for these changes.
STATEMENT OF CASH FLOWS: Cash and cash equivalents are defined as "Cash
and due from banks" and "Federal funds sold and securities purchased
under resale agreements."
2. NEW ACCOUNTING STANDARDS
In April 2002, the Financial Accounting Standards Board (FASB) issued Statement
No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections. This Statement rescinds Statement
No. 4, Reporting Gains and Losses from Extinguishment of Debt, and an amendment
of that Statement, Statement No. 64, Extinguishments of Debt Made to Satisfy
Sinking-Fund Requirements. This Statement also rescinds Statement No. 44, Accounting
for Intangible Assets of Motor Carriers. Statement No. 145 amends Statement
No. 13, Accounting for Leases, to eliminate an inconsistency between the required
accounting for sale-leaseback transactions and the required accounting for certain
lease modifications that have economic effects that are similar to sale-leaseback
transactions. In addition, Statement No. 145 requires lease modifications to
be accounted for in the same manner as sale-leaseback transactions. The provisions
of this Statement were effective for financial statements issued on or after
May 15, 2002.
In September 2002, the FASB issued Statement No. 146, Accounting for Costs
Associated with Exit Activities. This Statement addresses financial accounting
and reporting for costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force (EITF) Issue No. 94-3, Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring). Statement No. 146 requires that
a liability for a cost associated with an exit or disposal activity be recognized
using fair value when the liability is incurred. The provisions of this Statement
are effective for exit or disposal activities that are initiated after December
31, 2002.
In October 2002, the FASB issued Statement No. 147, Acquisition of Certain
Financial Institutions. This Statement provides guidance on the accounting for
the acquisition of a financial institution, which had previously been addressed
in FASB Statement No. 72, Accounting for Certain Acquisitions of Banking and
Thrift Institutions. Statement No. 147 requires the excess of the fair value
of liabilities assumed over the fair value of the tangible and identifiable
assets acquired in a business combination to be recognized as an unidentifiable
intangible asset in accordance with Statement No. 141 and No.
142. In addition, any long-term customer-relationship intangible assets, such
as depositor-relationship, borrower-relationship, and credit cardholder intangible
assets, will be required to be tested for impairment in accordance with Statement
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, as
amended. The provisions of Statement No. 147 became effective October 1, 2002.
In November 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others (the Interpretation). The Interpretation will change
current practice in the accounting for, and disclosure of, guarantees, which
for Huntington apply generally to its standby letters of credit. The Interpretation
requires certain guarantees to be recorded at fair value, which differs from
the current practice of recording a liability generally when a loss is probable
and reasonably estimable, as those terms are defined in FASB Statement No. 5,
Accounting for Contingencies. The Interpretation also requires a guarantor to
make significant new disclosures, even when the likelihood of making any payments
under the guarantee is remote, which also differs from current practice. The
recognition requirements of this Interpretation are to be applied prospectively
to guarantees issued or modified after December 31, 2002.
The adoption of Statements No. 145, No. 146, and No. 147 and Interpretation
No. 45 are not expected to have a material impact on Huntington's results of
operations or financial condition.
In December 2002, the FASB issued Statement No. 148, Accounting for Stock-Based
Compensation--Transition and Disclosure. This Statement amends Statement No.
123, Accounting for Stock-Based Compensation, to provide alternative methods
of transition to Statement No. 123's fair value method of accounting for stock-based
employee compensation. Statement No. 148 also amends the disclosure provisions
of Statement 123 and APB Opinion No. 28, Interim Financial Reporting, to require
disclosure in the summary of significant accounting policies of the effects
of an entity's accounting policy with respect to stock-based employee compensation
on reported net income and earnings per share in annual and interim financial
statements. While Statement No. 148 does not amend Statement No. 123 to require
companies to account for employee stock options using the fair value method,
the disclosure provisions of Statement No. 148 are applicable to all companies
with stock-based employee compensation, regardless of whether they account for
that compensation using the fair value method of Statement No. 123 or the intrinsic
value method of APB Opinion No. 25, which is the method currently used by Huntington.
In January 2003, the FASB issued Interpretation No. 46 (FIN 46), Consolidation
of Variable Interest Entities. This Interpretation of Accounting Research Bulletin
No. 51 (ARB 51), Consolidated Financial Statements, addresses consolidation
by business enterprises where ownership interests in an entity may vary over
time or, in many cases, of special-purpose entities (SPEs). To be consolidated
for financial reporting, these entities must have certain characteristics. ARB
51 requires that an enterprise's consolidated financial statements include subsidiaries
in which the enterprise has a controlling financial interest. FIN 46 requires
existing unconsolidated variable interest entities to be consolidated by their
primary beneficiaries if the entities do not effectively disperse risks among
parties involved. An enterprise that holds significant variable interests in
such an entity, but is not the primary beneficiary, is required to disclose
certain information regarding its interests in that entity. FIN 46 applies in
the first fiscal year or interim period beginning after June 15, 2003, to variable
interest entities in which an enterprise holds an interest that it acquired
before February 1, 2003. It also applies immediately to variable interest entities
created after January 31, 2003, and to variable interest entities in which an
enterprise obtains an interest after that date. FIN 46 may be applied (1) prospectively
with a cumulative-effect adjustment as of the date on which it is first applied,
or (2) by restating previously issued financial statements for one or more years
with a cumulative-effect adjustment as of the beginning of the first year restated.
Huntington is reviewing the implications of FIN 46 and is considering the
adoption methods permitted. Management believes that the most significant impact
of adoption will be the consolidation of one of the securitization trusts formed
in 2000. The consolidation of that securitization trust will involve the recognition
of the trust's net assets, which, at December 31, 2002, included $1,017 million
of indirect automobile loans, $100 million of cash, and $1,000 million of secured
debt obligations with an interest rate based on commercial paper rates. Adoption
will also eliminate the retained interest in the securitization trust and its
servicing asset related to the loans in the trust, with carrying values at the
end of 2002 of $152 million and $12 million, respectively. The impact to Huntington's
equity and results of operations will depend on the method of transition adopted
under this new interpretation. Huntington will adopt this new standard no later
than the end of the third quarter of 2003.
3. RESTATEMENT OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR OPERATING
LEASES (AMENDMENT NO. 1)
On May 20, 2003, Huntington restated its financial results to reclassify certain
automobile leases from the direct financing lease method to the operating lease
method of accounting. The appropriate classification of automobile leases as
operating leases or direct financing leases under Statement of Financial Accounting
Standards (Statement) No. 13, Accounting for Leases, can be impacted by residual
value insurance coverage. Since October 2000, Huntington has had residual value
insurance coverage on its entire automobile lease portfolio to protect it from
the risk of loss resulting from declines in used car prices. Such losses arise
if the market value of the automobile at the end of the lease term is less than
the residual value embedded in the original lease contract. Management believes
these policies effectively protect Huntington from the risk of declining used
car prices. In April 2003, management determined that, due to provisions in
certain of its residual value insurance policies, the leases covered by these
policies would not qualify as direct financing leases.
For leases originated prior to May 2002, the residual value insurance policies
contain aggregate loss caps. The residuals insured under these policies are not
considered guaranteed, and, accordingly, the related leases fail to qualify as
direct financing leases under Statement No. 13. As a result, leases originated
prior to May 2002 have been reclassified as operating leases for all periods presented.
As of December 31, 2002, $2.3 billion of such leases, net of accumulated depreciation,
are reflected in the Consolidated Balance Sheets as operating lease assets. All
leases originated since April 2002 are covered under a new residual value insurance
policy (the "New Policy") which insures the full residual value of each
vehicle and includes no aggregate loss cap. Leases with residual gains are netted
with leases with residual losses when claims are settled. The netting provision
of the New Policy precluded Huntington from determining the amount of the guaranteed
residual of any individual leased asset within the portfolio at lease inception.
Thus, the related leases failed to qualify as direct financing leases. Huntington
has amended the New Policy, retroactive to April 2002, by adding an endorsement
that adds a level of insurance sufficient to meet the criteria as a residual value
guarantee pursuant to Statement No. 13, on an individual lease-by-lease basis,
with no netting provisions. In addition, Huntington continues to maintain insurance
coverage that insures the full value of the leased residuals. Accordingly, and
in reliance on guidance furnished by the Securities and Exchange Commission in
its announcement at the Financial Accounting Standards Board Emerging Issues Task
Force meeting on May 15, 2003, all leases covered under the New Policy, as amended,
are now appropriately classified as direct financing leases in the accompanying
financial statements. As of December 31, 2002, $0.9 billion of such leases were
included in loans and leases in the Consolidated Balance Sheets before the impact
of the subsequent amendment discussed in Note 4. It is management's intention
to insure the residuals associated with future originations under the New Policy,
as amended, and to classify such new originations as direct financing leases.
The results of this restatement, along with the restatement outlined in Note
4, are reflected in the consolidated financial statements, these notes to the
consolidated financial statements, and management's discussion and analysis
for all current and prior periods included in this report. The following tables
reflect the previously reported amounts before the May 20, 2003, restatement
as well as the impact of this restatement by financial statement line in Huntington's
balance sheets at December 31, 2002 and December 31, 2001, and income statements
for the years and all quarters in 2002 and 2001, and for the year 2000:
DECEMBER 31, 2002 DECEMBER 31, 2001
------------------------------- -------------------------------
PREVIOUSLY PREVIOUSLY
REPORTED ON REPORTED ON
(in thousands of dollars) MAR. 20, '03 RESTATED MAR. 20, '03 RESTATED
------------- ------------- ------------- -------------
BALANCE SHEET:
Total loans and direct financing leases $ 20,955,925 $ 18,645,189 $ 21,601,873 $ 18,500,800
Allowance for loan and lease losses 368,395 336,648 410,572 369,332
Net loans and direct financing leases 20,587,530 18,308,541 21,191,301 18,131,468
Operating lease assets -- 2,252,445 -- 3,072,432
Accrued income and other assets 532,690 537,775 536,390 554,978
Total Assets 27,578,710 27,557,251 28,500,159 28,531,346
Accrued expenses and other liabilities 1,070,991 1,062,868 887,487 901,848
Total liabilities 25,274,879 25,266,756 26,083,719 26,098,080
Retained earnings 232,509 219,173 24,077 40,903
Total shareholders' equity 2,303,831 2,290,495 2,416,440 2,433,266
Total Liabilities and Shareholders' Equity $ 27,578,710 $ 27,557,251 $ 28,500,159 $ 28,531,346
|
Twelve Months Ended December 31,
---------------------------------------------------------------------------------------------------
2002 2001 2000
----------------------------- ----------------------------- ----------------------------
Previously Previously Previously
INCOME STATEMENT: Reported on Reported on Reported on
(in thousands of dollars) Mar. 20, '03 Restated Mar. 20, '03 Restated Mar. 20, '03 Restated
------------------------- ------------ ----------- ------------ ----------- ------------ -----------
Net interest income $ 983,802 $ 791,151 $ 996,182 $ 746,866 $ 942,432 $ 706,049
Provision for loan and
lease losses 227,340 194,426 308,793 257,326 90,479 61,464
Net interest income after
provision 756,462 596,725 687,389 489,540 851,953 644,585
Operating lease income -- 641,785 -- 699,857 -- 635,243
Other non-interest income 61,718 69,904 59,767 59,767 58,795 58,795
Total non-interest income 684,811 1,334,782 509,480 1,209,337 493,559 1,128,802
Operating lease expense -- 518,970 -- 558,626 -- 494,800
Restructuring charges 56,184 56,184 99,957 79,957 50,000 --
Other non-interest expense 56,127 73,797 65,313 79,696 46,059 22,596
Total non-interest expense 852,048 1,388,688 1,023,587 1,576,596 885,617 1,306,954
Income before income taxes 589,225 542,819 173,282 122,281 459,895 466,433
Income taxes 226,000 209,755 (5,239) (23,088) 131,449 133,736
Net income $ 363,225 $ 333,064 $ 178,521 $ 145,369 $ 328,446 $ 332,697
Earnings per share:
Basic $ 1.50 $ 1.37 $ 0.71 $ 0.58 $ 1.32 $ 1.34
Diluted $ 1.49 $ 1.36 $ 0.71 $ 0.58 $ 1.32 $ 1.33
OTHER INFORMATION:
Net charge-offs $ 239,319 $ 196,912 $ 189,447 $ 146,269 $ 83,089 $ 61,647
|
Three Months Ended (Unaudited)
---------------------------------------------------------------------------------------------------
December 31, 2002 September 30, 2002 June 30, 2002
----------------------------- ----------------------------- ----------------------------
Previously Previously Previously
INCOME STATEMENT: Reported on Reported on Reported on
(in thousands of dollars) Mar. 20, '03 Restated Mar. 20, '03 Restated Mar. 20, '03 Restated
------------------------- ------------ ----------- ------------ ----------- ------------ -----------
Net interest income $ 249,702 $ 210,255 $ 249,416 $ 205,484 $ 241,859 $ 190,981
Provision for loan and
lease losses 57,418 51,236 60,249 54,304 53,892 49,876
Net interest income
after provision 192,284 159,019 189,167 151,180 187,967 141,105
Operating lease income -- 143,465 -- 154,367 -- 168,047
Other non-interest income 17,025 19,130 18,723 21,044 15,039 17,033
Total non-interest income 126,021 271,591 139,382 296,070 117,980 288,021
Operating lease expense -- 120,747 -- 125,743 -- 131,695
Other non-interest expense 14,182 22,269 13,576 16,563 13,858 18,135
Total non-interest expense 202,695 331,529 193,723 322,453 192,060 328,032
Income before income taxes 115,610 99,081 134,826 124,797 113,887 101,094
Income taxes 30,475 24,687 36,703 33,193 31,647 27,169
Net income $ 85,135 $ 74,394 $ 98,123 $ 91,604 $ 82,240 $ 73,925
Earnings per share:
Basic $ 0.36 $ 0.32 $ 0.41 $ 0.38 $ 0.33 $ 0.30
Diluted $ 0.36 $ 0.32 $ 0.41 $ 0.38 $ 0.33 $ 0.30
OTHER INFORMATION:
Net charge-offs $ 94,938 $ 83,158 $ 43,700 $ 33,785 $ 44,900 $ 36,997
|
Three Months Ended (Unaudited)
---------------------------------------------------------------------------------------------------
March 31, 2002 December 31, 2001 September 30, 2001
----------------------------- ----------------------------- ----------------------------
Previously Previously Previously
INCOME STATEMENT: Reported on Reported on Reported on
(in thousands of dollars) Mar. 20, '03 Restated Mar. 20, '03 Restated Mar. 20, '03 Restated
------------------------- ------------ ----------- ------------ ----------- ------------ -----------
Net interest income $ 242,825 $ 184,431 $ 255,238 $ 196,294 $ 249,787 $ 186,866
Provision for loan and
lease losses 55,781 39,010 108,275 101,075 49,559 34,053
Net interest income
after provision 187,044 145,421 146,963 95,219 200,228 152,813
Operating lease income -- 175,906 -- 180,382 -- 183,642
Other non-interest income 10,931 12,697 16,088 16,088 15,755 15,755
Total non-interest income 301,428 479,100 133,097 313,479 130,456 314,098
Operating lease expense -- 140,785 -- 140,575 -- 138,538
Other non-interest expense 14,511 16,830 14,017 15,580 14,605 25,145
Total non-interest expense 263,570 406,674 242,497 384,635 279,707 428,785
Income before income taxes 224,902 217,847 37,563 24,063 50,977 38,126
Income taxes 127,175 124,706 (28,086) (32,810) 8,348 3,850
Net income $ 97,727 $ 93,141 $ 65,649 $ 56,873 $ 42,629 $ 34,276
Earnings per share:
Basic $ 0.39 $ 0.37 $ 0.26 $ 0.23 $ 0.17 $ 0.14
Diluted $ 0.39 $ 0.37 $ 0.26 $ 0.23 $ 0.17 $ 0.14
OTHER INFORMATION:
Net charge-offs $ 55,781 $ 42,972 $ 56,146 $ 47,711 $ 39,743 $ 29,348
|
Three Months Ended (Unaudited)
-----------------------------------------------------------------
June 30, 2001 March 31, 2001
----------------------------- -----------------------------
Previously Previously
INCOME STATEMENT: Reported on Reported on
(in thousands of dollars) Mar. 20, '03 Restated Mar. 20, '03 Restated
------------------------- ------------ ----------- ------------ -----------
Net interest income $ 248,033 $ 185,080 $ 243,124 $ 178,626
Provision for loan and
lease losses 117,495 99,444 33,464 22,754
Net interest income
after provision 130,538 85,636 209,660 155,872
Operating lease income -- 176,418 -- 159,415
Other non-interest income 14,956 14,956 12,968 12,968
Total non-interest income 128,203 304,621 117,724 277,139
Operating lease expense -- 158,437 -- 121,076
Other non-interest expense 16,457 6,384 20,234 32,587
Total non-interest expense 267,293 395,657 234,090 367,519
Income before income taxes (8,552) (5,400) 93,294 65,492
Income taxes (10,929) (9,825) 25,428 15,697
Net income $ 2,377 $ 4,425 $ 67,866 $ 49,795
Earnings per share:
Basic $ 0.01 $ 0.02 $ 0.27 $ 0.20
Diluted $ 0.01 $ 0.02 $ 0.27 $ 0.20
OTHER INFORMATION:
Net charge-offs $ 65,465 $ 47,930 $ 28,093 $ 21,280
|
4. RESTATEMENT OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR DEFERRAL ACCOUNTING
AND OTHER REVENUE AND EXPENSES (AMENDMENT NO. 2)
Huntington voluntarily restated its earnings in Amendment No. 2 to its Annual
Report on Form 10-K/A (Amendment No. 2) to correct for timing errors in the
recognition of certain revenues and expenses. Specifically, Amendment No. 2
includes the following corrections:
Huntington previously did not defer loan and lease origination fees and certain
expenses, but rather recognized the net amount in the period of origination.
This restatement applies, on a retroactive basis, deferral accounting for loan
and lease origination fees and costs. The impact of the restatement decreased
total loans and direct financing leases, operating lease assets, accrued expenses
and other liabilities, retained earnings, net interest income, operating lease
income, mortgage banking income, other non-interest income, personnel costs,
and other non-interest expense.
Huntington previously amortized the loan referral fees paid to automobile
dealers (dealer premium) on a straight-line basis. As a result of this restatement,
Huntington is now amortizing these fees to interest income using methods that
closely approximate the results under the interest method. The impact of the
restatement reduced the amount of dealer premium included in automobile loans
and leases, reduced interest income on indirect loans and leases, and increased
gains on sales and securitizations of loans.
Huntington previously deferred sales commissions paid to employees for the
origination of deposits and amortized these payments to interest expense over
the expected life of the deposit. In this restatement, Huntington is recognizing
the expense on these sales commissions when the deposits were originated and
commissions were earned. The impact of the restatement decreased the interest
expense on deposits, increased service charges on deposit accounts, and increased
personnel costs.
Huntington offers its customers the ability to forego the payment of origination
fees at inception of a mortgage loan in exchange for a higher interest rate
over the life of the loan. Huntington had previously recorded origination fees
on such loans held for investment at inception. A loan premium was recognized
and amortized as a reduction of interest income on mortgage loans held for investment.
The impact of restatement reversed the loan premiums that were recognized as
mortgage banking income and increased the interest income recognized on mortgage
loans held for investment.
Prior to 2002, Huntington recognized, in the year incurred, the expenses or
gains for pension settlements, which are actuarially determined expenses or
gains related to lump-sum benefit payments paid to individuals who voluntarily
or involuntarily retire earlier than their expected retirement date or to individuals
who voluntarily or involuntarily separate from Huntington. The expense for 2002
pension settlements was deferred to be recognized over a subsequent eight year
period. As part of the restatement, Huntington recognized this expense consistent
with years prior to 2002, which increased other liabilities and increased personnel
costs in the fourth quarter of 2002.
Huntington previously recorded revenue from the sale of a contingent automobile
debt cancellation product by allocating a fixed portion of the proceeds from
each sale to revenue and reserves. The impact of the restatement increased the
amount of the reserve to cover claim losses on the products purchased by customers,
increased other liabilities, and increased other non-interest expenses.
Huntington previously recorded tax consulting expenses as a component of income
tax expense. The impact of the restatement reclassified those expenses to professional
services and had no impact on net income.
In 1998, Huntington entered into a sale-leaseback transaction. Huntington
recognized gains in 1998 and in 1999 as a reduction in occupancy expense above
the amounts that should have been recognized under a normal amortization schedule.
The impact of the restatement increased accrued expenses and other liabilities
and decreased retained earnings and occupancy expense.
In 1998, Huntington marked to market the ineffective portion of an interest
rate swap associated with a fixed rate subordinated debt offering initiated
in 1992. The swap was subsequently sold in 2000. The restatement marks to market
the ineffective portion of the interest rate swap (i.e., the excess notional
amount of the swap) for all periods prior to 1998 and then annually through
2000. The restatement increased income prior to 1998, reduced income in 1998
and 1999, and increased income in 2000, but had no cumulative impact on retained
earnings.
In 2001, Huntington negotiated a reduction in expenses on Bank Owned Life Insurance
which resulted in an increase in the cash surrender value of the policies at year
end 2001, but did not recognize the resulting income until 2002. The restatement
corrects the timing error by increasing income in 2001 and reducing income in
2002 by the same amount. There was no cumulative effect impact on retained earnings.
The results of this restatement are reflected in the consolidated financial
statements and footnotes. The following tables reflect the previously reported
amounts after the May 20, 2003, restatement as well as the impact of this restatement
by financial statement line in Huntington's balance sheets at December 31, 2002
and December 31, 2001, and income statements for the years and all quarters
in 2002 and 2001, and for the year 2000:
December 31, 2002 December 31, 2001
------------------------------------- -----------------------------------
Previously Previously
Reported on Reported on
(in thousands of dollars) May 20, '03 Restated May 20, '03 Restated
------------------------- -------------- -------------- -------------- --------------
BALANCE SHEET:
Total loans and direct financing leases $ 18,645,189 $ 18,587,403 $ 18,500,800 $ 18,467,919
Allowance for loan and lease losses 336,648 336,648 369,332 369,332
Net loans and direct financing leases 18,308,541 18,250,755 18,131,468 18,098,587
Operating lease assets 2,252,445 2,200,525 307,242 3,005,848
Accrued income and other assets 537,775 522,611 554,978 537,160
Total Assets 27,557,251 27,432,381 28,531,346 28,416,945
Accrued expenses and other liabilities 1,062,868 1,038,700 901,848 878,816
Total liabilities 25,266,756 25,242,588 26,098,080 26,075,048
Retained earnings (deficit) 219,173 118,471 40,903 (50,466)
Total shareholders' equity 2,290,495 2,189,793 2,433,266 2,341,897
Total Liabilities and Shareholders' Equity $ 27,557,251 $ 27,432,381 $ 28,531,346 $ 28,416,945
|
Twelve Months Ended December 31,
--------------------------------------------------------------------------------------------------
2002 2001 2000
---------------------------- ---------------------------- ---------------------------
Previously Previously Previously
INCOME STATEMENT: Reported on Reported on Reported on
(in thousands of dollars) May 20, '03 Restated May 20, '03 Restated May 20, '03 Restated
------------------------- ----------- ---------- ----------- ----------- ----------- ----------
Net interest income $ 791,151 $ 749,574 $ 746,866 $ 715,288 $ 706,049 $ 670,110
Net interest income
after provision 596,725 555,148 489,540 457,962 644,585 608,646
Operating lease income 641,785 657,074 699,857 691,733 635,243 623,835
Mortgage banking 47,989 32,033 59,148 54,518 38,025 32,772
Bank owned life insurance 46,005 43,123 38,241 41,123 39,544 39,544
Gain on sale of Florida
operations 175,344 182,470 -- -- -- --
Other non-interest income 69,904 72,206 59,767 59,284 58,795 69,157
Total non-interest income 1,334,782 1,341,704 1,209,337 1,199,942 1,128,802 1,123,202
Personnel costs 440,760 418,037 478,640 454,210 421,750 396,230
Net occupancy 60,264 59,539 77,184 76,449 75,882 75,197
Restructuring charges 56,184 48,973 79,957 79,957 -- --
Other non-interest expense 73,797 82,607 79,696 81,709 22,596 23,076
Total non-interest expense 1,388,688 1,374,147 1,576,596 1,562,427 1,306,954 1,283,131
Income before income taxes 542,819 522,705 122,281 95,477 466,433 448,717
Income taxes 209,755 198,974 (23,088) (39,319) 133,736 126,299
Net income $ 333,064 $ 323,731 $ 145,369 $ 134,796 $ 332,697 $ 322,418
Earnings per share:
Basic $ 1.37 $ 1.34 $ 0.58 $ 0.54 $ 1.34 $ 1.30
Diluted $ 1.36 $ 1.33 $ 0.58 $ 0.54 $ 1.33 $ 1.29
|
Three Months Ended (Unaudited)
-----------------------------------------------------------------------------------------------
December 31, 2002 September 30, 2002 June 30, 2002
--------------------------- --------------------------- -------------------------
Previously Previously Previously
INCOME STATEMENT: Reported on Reported on Reported on
(in thousands of dollars) May 20, '03 Restated May 20, '03 Restated May 20, '03 Restated
------------------------- ----------- --------- ----------- --------- ------------ --------
Net interest income $210,255 $199,179 $205,484 $191,265 $190,981 $180,261
Net interest income
after provision 159,019 147,943 151,180 136,961 141,105 130,385
Operating lease income 143,465 149,259 154,367 160,164 168,047 171,617
Mortgage banking 11,410 5,530 6,289 2,594 10,725 7,835
Bank owned life insurance 11,443 10,722 11,443 10,723 11,443 10,722
Other non-interest income 19,130 19,943 21,044 21,948 17,033 17,513
Personnel costs 113,852 110,231 107,477 100,662 105,146 99,115
Net occupancy 13,454 13,370 14,815 14,676 14,756 14,504
Total non-interest income 271,591 271,855 296,070 298,602 288,021 288,714
Other non-interest expense 22,269 29,880 16,563 16,963 18,135 18,535
Total non-interest expense 331,529 329,309 322,453 319,496 328,032 323,746
Income before income taxes 99,081 90,489 124,797 116,067 101,094 95,353
Income taxes 24,687 21,226 33,193 28,052 27,169 24,375
Net income $ 74,394 $ 69,263 $ 91,604 $ 88,015 $ 73,925 $ 70,978
Earnings per share:
Basic $ 0.32 $ 0.30 $ 0.38 $ 0.37 $ 0.30 $ 0.29
Diluted $ 0.32 $ 0.29 $ 0.38 $ 0.36 $ 0.30 $ 0.29
|
Three Months Ended (Unaudited)
---------------------------------------------------------------------------------------------------
March 31, 2002 December 31, 2001 September 30, 2001
----------------------------- ----------------------------- ----------------------------
Previously Previously Previously
INCOME STATEMENT: Reported on Reported on Reported on
(in thousands of dollars) May 20, '03 Restated May 20, '03 Restated May 20, '03 Restated
------------------------- ------------ ----------- ------------ ----------- ------------ -----------
Net interest income $ 184,431 $ 178,869 $ 196,294 $ 188,035 $ 186,866 $ 179,078
Net interest income
after provision 145,421 139,859 95,219 86,960 152,813 145,025
Operating lease income 175,906 176,034 180,382 178,588 183,642 181,851
Mortgage banking 19,565 16,074 15,768 14,082 14,616 13,308
Banked owned life insurance 11,676 10,956 9,560 11,001 9,560 11,001
Gain on sale of Florida
operations 175,344 182,470 -- -- -- --
Other non-interest income 12,697 12,802 16,088 16,005 15,755 15,533
Total non-interest income 479,100 482,533 313,479 311,629 314,098 312,465
Personnel costs 114,285 108,029 118,143 111,306 120,767 115,335
Net occupancy 17,239 16,989 19,950 19,766 19,266 19,082
Other non-interest expense 16,830 17,229 15,580 16,083 25,145 25,648
Total non-interest expense 406,674 401,596 384,635 384,203 428,785 424,623
Income before income taxes 217,847 220,796 24,063 14,386 38,126 32,867
Income taxes 124,706 125,321 (32,810) (40,657) 3,850 886
Net income $ 93,141 $ 95,475 $ 56,873 $ 55,043 $ 34,276 $ 31,981
Earnings per share:
Basic $ 0.37 $ 0.38 $ 0.23 $ 0.22 $ 0.14 $ 0.13
Diluted $ 0.37 $ 0.38 $ 0.23 $ 0.22 $ 0.14 $ 0.13
|
Three Months Ended (Unaudited)
-------------------------------------------------------------------
June 30, 2001 March 31, 2001
--------------------------------- -----------------------------
Previously Previously
INCOME STATEMENT: Reported on Reported on
(in thousands of dollars) May 20, '03 Restated May 20, '03 Restated
------------------------- -------------- -------------- -------------- -----------
Net interest income $ 185,080 $ 177,254 $ 178,626 $ 170,921
Net interest income
after provision 85,636 77,810 155,872 148,167
Operating lease income 176,418 174,151 159,415 157,143
Mortgage banking 18,733 18,168 10,031 8,960
Other non-interest income 14,956 14,619 12,968 13,127
Total non-interest income 304,621 301,681 277,139 274,167
Personnel costs 122,068 116,048 117,662 111,521
Net occupancy 18,188 18,004 19,780 19,597
Other non-interest expense 6,384 6,887 32,587 33,091
Total non-interest expense 395,657 390,907 367,519 362,694
(Loss) income before income taxes (5,400) (11,416) 65,492 59,640
Income taxes (9,825) (12,548) 15,697 13,000
Net income $ 4,425 $ 1,132 $ 49,795 $ 46,640
Earnings per share:
Basic $ 0.02 $ 0.00 $ 0.20 $ 0.19
Diluted $ 0.02 $ 0.00 $ 0.20 $ 0.19
|
5. RESTRUCTURING
In July 2001, Huntington announced a strategic refocusing plan (the Plan).
The Plan included the sale of Huntington's Florida banking and insurance operations,
the consolidation of numerous non-Florida branch offices, and credit-related
and other actions to strengthen Huntington's balance sheet and financial performance,
including the use of excess regulatory capital generated by the sale to initiate
a share repurchase program. In 2002, pre-tax restructuring charges associated
with the Plan totaled $49.0 million ($31.8 million after-tax, or $0.13 per share)
and are reflected in non-interest expense in the accompanying audited consolidated
financial statements.
These charges included expenses of $32.7 million related to the sale of the
Florida operations, $8.0 million for asset impairment, $4.3 million for the
exit of certain e-commerce activities, $1.8 million related to vacating facilities,
and $2.2 million for other costs. Combined with the amounts recorded in 2001,
these pre-tax charges totaled $199.4 million ($129.6 million after-tax, or $0.52
per share) and consisted of $65.2 million related to credit quality, $25.3 million
for asset impairment, $34.7 million for the costs related to sell the Florida
operations, $20.1 million for the exit or curtailment of certain e-commerce
activities, $15.6 million related to owned or leased facilities that Huntington
vacated, and $38.5 million related to reduction of ATMs, employee severance,
legal, accounting, and consulting fees, and other operational costs.
Restructuring reserves of $7.2 million established in 1998 and 2001 were released
in 2002 based on management's assessment of future claims on these reserves.
The release of 1998 reserves consisted of a $5.0 million legal settlement received
by Huntington in December 2002. Additionally, $2.2 million of reserves established
in 2001 were released. At December 31, 2002, Huntington had $4.1 million remaining
in reserves established in 1998 for the exit of under performing business units
and $14.4 million remaining in restructuring reserves established in 2001. Huntington
expects that these remaining reserves will be adequate to fund the remaining
estimated future cash outlays that are expected in the completion of the exit
activities.
In August 2002, Huntington restructured its interest in Huntington Merchant
Services, L.L.C. (HMS), Huntington's merchant services business, in a transaction
with First Data Merchant Services Corporation, a subsidiary of First Data Corp.
Under the agreement, Huntington extended its long-term merchant services relationship
with First Data. In addition, as part of the transaction, First Data obtained
all of Huntington's Florida-related merchant business and increased its equity
interest in HMS. This transaction resulted in a $24.5 million pre-tax gain ($16.0
million after tax, or $.07 per share) in 2002 while Huntington retained a nominal
equity ownership in the business. At December 31, 2002, Huntington had a contingency
reserve of $1.8 million related to this restructuring of its interest in HMS.
6. SALE OF FLORIDA OPERATIONS
On February 15, 2002, Huntington completed the sale of its Florida operations
to SunTrust Banks, Inc. Included in the sale were $4.8 billion of deposits and
other liabilities and $2.8 billion of loans and other tangible assets. Huntington
received a deposit premium of 15%, or $711.9 million. The total net pre-tax
gain from the sale was $182.5 million and was reflected in non-interest income.
The after-tax gain was $61.4 million, or $0.25 per common share. Income taxes
related to this transaction were $121.0 million, an amount higher than the tax
impact at the statutory rate of 35% because most of the goodwill relating to
the Florida operations was non-deductible for tax purposes.
On July 2, 2002, Huntington also completed the sale of its Florida insurance
operations, the J. Rolfe Davis Insurance Agency, Inc. (JRD). Pro forma financial
information reflecting the effect of the sales is presented and described below.
The unaudited pro forma consolidated income statement is presented for the
year ended December 31, 2001, giving effect to the sale as if it had occurred
on January 1, 2001, and does not include the gain realized on the sale of Huntington's
Florida banking and insurance operations. This pro forma consolidated financial
statement is not indicative of the results of operations that would have actually
occurred had the transaction been consummated during 2001 or as the date indicated.
This pro forma financial information is also not intended to be an indication
of the results of operations that may be attained in the future. This pro forma
consolidated financial statement should be read in conjunction with Huntington's
historical financial statements.
The income statement column entitled Florida Operations includes all identifiable
direct revenue and expenses for the Florida operations for the year ended December
31, 2001, and any indirect revenue and expenses that management expected to
cease with the sale. In addition, net interest income in that column includes
a funding credit of $68.5 million related to $1.9 billion of funding that Florida
provided to Huntington. That funding credit was based on the average one-year
LIBOR rate for 2001 of 3.64%. The income statement column entitled Related Transactions
reflects $26.4 million of interest that was expected to be earned on both the
$711.9 million deposit premium and the $12.2 million proceeds for the sale of
JRD over a one-year period at the same LIBOR rate of 3.64%, the $30.2 million
of amortization expense on intangibles related to the Florida operations, and
the applicable income taxes.
UNAUDITED PRO FORMA CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED
DECEMBER 31, 2001
Florida Related Huntington
(in thousands of dollars) Huntington Operations Transactions Pro Forma
-------------------------------------- ------------ ------------ ------------ ------------
Net interest income $ 715,288 $ (108,629) $ 26,356 $ 633,015
Provision for loan and lease losses 257,326 (15,121) -- 242,205
------------ ------------ ------------ ------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN AND LEASE LOSSES 457,962 (93,508) 26,356 390,810
------------ ------------ ------------ ------------
Non-interest income 1,199,942 (76,992) -- 1,122,950
Non-interest expense 1,562,427 (132,707) (30,180) 1,399,540
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES 95,477 (37,793) 56,536 114,220
Income taxes (39,319) (12,507) 17,237 (34,589)
------------ ------------ ------------ ------------
NET INCOME $ 134,796 $ (25,286) $ 39,299 $ 148,809
============ ============ ============ ============
NET INCOME PER COMMON SHARE -- DILUTED $ 0.54 $ (0.10) $ 0.16 $ 0.59
============ ============ ============ ============
OPERATING NET INCOME (1) $ 232,560 $ (25,286) $ 39,299 $ 246,573
============ ============ ============ ============
OPERATING NET INCOME PER COMMON
SHARE -- DILUTED (1) $ 0.92 ($ 0.10) $ 0.16 $ 0.98
============ ============ ============ ============
|
(1) Excludes restructuring charges.
Pro forma net income for 2002 (unaudited), which excluded the after-tax combined
loss of the Florida banking operations through February 15, 2002 and the Florida
insurance operations through June 30, 2002 of $1.5 million, and any after-tax
gains and restructuring charges not related to the sale, was $285.1 million,
or $1.17 per share. Excluding the after-tax Merchant Services restructuring
gain and the non-Florida related restructuring charges, pro forma net income
for 2002 (unaudited), was $279.7 million, or $1.15 per share.
7. EARNINGS PER SHARE
Basic earnings per share is the amount of earnings for the period available
to each share of common stock outstanding during the reporting period. Diluted
earnings per share is the amount of earnings available to each share of common
stock outstanding during the reporting period adjusted for the potential issuance
of common shares for stock options. The calculation of basic and diluted earnings
per share for each of the three years ended December 31 is as follows:
(in thousands, except per share amounts) 2002 2001 2000
-------- -------- --------
NET INCOME $323,731 $134,796 $322,418
======== ======== ========
Average common shares outstanding 242,279 251,078 248,709
Dilutive effect of common stock equivalents 1,733 638 861
-------- -------- --------
DILUTED AVERAGE COMMON SHARES OUTSTANDING 244,012 251,716 249,570
======== ======== ========
EARNINGS PER SHARE
Basic $ 1.34 $ 0.54 $ 1.30
Diluted $ 1.33 $ 0.54 $ 1.29
|
Average common shares outstanding and the dilutive effect of stock options
have been adjusted for the 10% stock dividend paid in 2000. The average market
price of Huntington's common stock for the period was used in determining the
dilutive effect of outstanding stock options. Common stock equivalents are computed
based on the number of shares subject to stock options that have an exercise
price less than the average market price of Huntington's common stock for the
period.
Approximately 7.7 million, 9.9 million, and 7.6 million stock options were
outstanding at the end of 2002, 2001, and 2000, respectively, but were not included
in the computation of diluted earnings per share because the options' exercise
price was greater than the average market price of the common shares for the
period and, therefore, the effect would be antidilutive. The weighted average
exercise price for these options was $22.19 per share, $20.96 per share, and
$21.49 per share at the end of the same respective periods.
At December 31, 2002, a total of 521,919 common shares associated with a recent
acquisition were held in escrow, subject to future issuance contingent upon
meeting certain contractual performance criteria. These shares, which were included
in treasury stock, will be included in the computation of basic and diluted
earnings per share at the beginning of the period when all conditions necessary
for their issuance have been met. Dividends paid on these shares are reinvested
in the common stock and are also held in escrow.
8. COMPREHENSIVE INCOME
The change in the components of Huntington's Other Comprehensive Income in
each of the three years ended December 31 were as follows:
(in thousands of dollars) 2002 2001 2000
--------- --------- ---------
Cumulative effect of change in accounting method for derivatives
used in cash flow hedging relationships:
Unrealized net losses $ -- $ (14,020) $ --
Related tax benefit -- 4,907 --
--------- --------- ---------
Net -- (9,113) --
--------- --------- ---------
Minimum pension liability:
Unrealized net loss (300) -- --
Related tax benefit 105 -- --
--------- --------- ---------
Net (195) -- --
--------- --------- ---------
Unrealized holding gains on securities available for sale arising
during the period:
Unrealized net gains 46,655 84,256 145,011
Related tax expense (16,082) (29,796) (51,323)
--------- --------- ---------
Net 30,573 54,460 93,688
--------- --------- ---------
Unrealized holding gains on derivatives used in cash flow hedging
relationships arising during the period:
Unrealized net gains 14,799 7,895 --
Related tax expense (5,179) (2,763) --
--------- --------- ---------
Net 9,620 5,132 --
--------- --------- ---------
Less: Reclassification adjustment for net gains from sales
of securities available for sale realized during the period:
Realized net gains 4,902 723 37,101
Related tax expense (1,716) (252) (12,986)
--------- --------- ---------
Net 3,186 471 24,115
--------- --------- ---------
Total Other Comprehensive Income $ 36,812 $ 50,008 $ 69,573
========= ========= =========
|
Activity in Accumulated Other Comprehensive Income for the most recent three years
is as follows:
UNREALIZED GAINS
UNREALIZED GAINS (LOSSES) ON DERIVATIVE
MINIMUM (LOSSES) ON INSTRUMENTS USED IN
PENSION SECURITIES CASH FLOW HEDGING
(IN THOUSANDS OF DOLLARS) LIABILITY AVAILABLE FOR SALE RELATIONSHIPS TOTAL
--------- ------------------ --------------------- --------
Balance, December 31, 1999 $ -- $(94,093) $ -- $(94,093)
Period change -- 69,573 -- 69,573
-------- -------- -------- --------
Balance, December 31, 2000 -- (24,520) -- (24,520)
Change in accounting method -- -- (9,113) (9,113)
Current-period change -- 53,989 5,132 59,121
-------- -------- -------- --------
Balance, December 31, 2001 -- 29,469 (3,981) 25,488
Current-period change (195) 27,387 9,620 36,812
-------- -------- -------- --------
BALANCE, DECEMBER 31, 2002 $ (195) $ 56,856 $ 5,639 $ 62,300
======== ======== ======== ========
|
9. SECURITIES
Securities available for sale at December 31 were as follows:
UNREALIZED
----------------------------
AMORTIZED GROSS GROSS FAIR
(in thousands of dollars) COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
2002
U.S. Treasury $ 18,550 $ 1,362 $ -- $ 19,912
Federal agencies
Mortgage-backed securities 1,755,437 44,074 254 1,799,257
Other agencies 782,287 26,772 544 808,515
---------- ---------- ---------- ----------
Total U.S. Treasury and Federal agencies 2,556,274 72,208 798 2,627,684
Retained interests in securitizations 146,160 13,818 -- 159,978
Other securities 613,607 5,600 3,500 615,707
---------- ---------- ---------- ----------
TOTAL SECURITIES AVAILABLE FOR SALE $3,316,041 $ 91,626 $ 4,298 $3,403,369
========== ========== ========== ==========
|
UNREALIZED
----------------------------
AMORTIZED GROSS GROSS FAIR
(in thousands of dollars) COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
2001
U.S. Treasury $ 38,928 $ 612 $ -- $ 39,540
Federal agencies
Mortgage-backed securities 1,317,555 22,559 1,200 1,338,914
Other agencies 920,679 24,313 1,367 943,625
---------- ---------- ---------- ----------
Total U.S. Treasury and Federal agencies 2,277,162 47,484 2,567 2,322,079
Retained interests in securitizations 159,790 -- -- 159,790
Other securities 367,052 5,873 5,215 367,710
---------- ---------- ---------- ----------
Total Securities Available For Sale $2,804,004 $ 53,357 $ 7,782 $2,849,579
========== ========== ========== ==========
|
Other securities available for sale include privately placed collateralized
mortgage obligations, Federal Home Loan Bank and Federal Reserve Bank stock,
corporate debt and municipal securities, and marketable equity securities.
Contractual maturities of securities available for sale as of December 31 were:
2002 2001
----------------------------- ----------------------------
AMORTIZED FAIR Amortized Fair
(in thousands of dollars) COST VALUE Cost Value
---------- ---------- ---------- ----------
Under 1 year $ 42,056 $ 43,149 $ 12,011 $ 12,085
1 - 5 years 868,600 896,651 1,066,383 1,090,164
6 - 10 years 414,122 424,287 218,816 222,535
Over 10 years 1,802,257 1,835,670 1,242,609 1,259,229
Retained interests in securitizations 146,160 159,978 159,790 159,790
Marketable equity securities 42,846 43,634 104,395 105,776
---------- ---------- ---------- ----------
TOTAL SECURITIES AVAILABLE FOR SALE $3,316,041 $3,403,369 $2,804,004 $2,849,579
========== ========== ========== ==========
|
At December 31, 2002, the carrying value of securities pledged to secure public
and trust deposits, trading account liabilities, U.S. Treasury demand notes
and security repurchase agreements totaled $2.6 billion. There were no securities
of a single issuer, which are non-governmental or government-sponsored, that
exceeded ten percent of shareholders' equity at December 31, 2002.
Gross gains from sales of securities of $5.4 million, $9.2 million, and $66.5
million, were realized in 2002, 2001, and 2000, respectively. Gross losses totaled
$0.5 million in 2002, $8.5 million in 2001, and $29.4 million in 2000.
Investment securities held to maturity at December 31, 2002 and 2001, were
comprised of investments in obligations of states and political subdivisions.
The amortized cost, unrealized gains and losses, and fair values of investment
securities held to maturity at December 31 were:
(in thousands of dollars) 2002 2001
------- -------
Amortized cost $ 7,546 $12,322
Unrealized gross gains 192 215
Unrealized gross losses 13 38
------- -------
FAIR VALUE $ 7,725 $12,499
======= =======
|
Contractual maturities of investment securities held to maturity with yields
adjusted to reflect fully taxable equivalent basis at December 31 were:
2002 2001
------------------------------------- -------------------------------------
AMORTIZED FAIR Amortized Fair
(in thousands of dollars) COST VALUE YIELD Cost Value Yield
--------- ------- ----- --------- ------- ----
Under 1 year $ 2,775 $ 2,793 7.37% $ 3,997 $ 4,016 7.54%
1 - 5 years 3,096 3,209 8.03% 6,369 6,508 7.78%
6 - 10 years 1,432 1,471 8.49% 1,713 1,726 8.48%
Over 10 years 243 252 8.18% 243 249 8.18%
------- ------- ---- ------- ------- ----
TOTAL INVESTMENT SECURITIES $ 7,546 $ 7,725 7.88% $12,322 $12,499 7.81%
======= ======= ==== ======= ======= ====
|
10. LOANS AND LEASES
At December 31, loans and leases were comprised of the following:
(in thousands of dollars) 2002 2001
----------- -----------
Commercial loans $ 5,608,443 $ 6,442,270
Real estate
Commercial loans 2,718,773 2,496,121
Construction loans 1,010,077 1,321,070
----------- -----------
TOTAL COMMERCIAL AND COMMERCIAL REAL ESTATE LOANS 9,337,293 10,259,461
----------- -----------
Consumer
Automobile loans and leases 3,915,553 2,959,933
Home equity loans and lines of credit 3,198,487 3,580,106
Residential mortgage loans 1,740,319 1,123,682
Other loans 395,751 544,737
----------- -----------
TOTAL CONSUMER LOANS 9,250,110 8,208,458
----------- -----------
TOTAL LOANS AND LEASES $18,587,403 $18,467,919
=========== ===========
|
At December 31, 2002, real estate qualifying loans pledged to secure advances
from the Federal Home Loan Bank was $2.7 billion. Real estate qualifying loans
are comprised of home equity loans and lines of credit and residential mortgage
loans secured by first and second liens. At this same date, $1.5 billion of
commercial loans have been pledged to secure potential discount window borrowings
from the Federal Reserve.
Huntington's loan and lease portfolio includes lease financing receivables
consisting of direct financing leases on equipment, which are included in commercial
loans, and on automobiles, which are included in automobile loans and leases.
Net investment in lease financing receivables by category at December 31 were
as follows:
(in thousands of dollars) 2002 2001
----------- -----------
Commercial
Lease payments receivable $ 191,034 $ 28,791
Estimated residual value of leased assets 28,388 4,480
----------- -----------
Gross investment in commercial lease financing receivables 219,422 33,271
Unearned income (24,678) (2,859)
----------- -----------
TOTAL NET INVESTMENT IN COMMERCIAL LEASE FINANCING RECEIVABLES $ 194,744 $ 30,412
=========== ===========
Consumer
Lease payments receivable $ 645,544 $ 86,662
Estimated residual value of leased assets 362,474 28,091
----------- -----------
Gross investment in consumer lease financing receivables 1,008,018 114,753
Deferred origination fees and costs (960) 1,119
Unearned income (133,459) (9,431)
----------- -----------
TOTAL NET INVESTMENT IN CONSUMER LEASE FINANCING RECEIVABLES $ 873,599 $ 106,441
=========== ===========
|
RELATED PARTY TRANSACTIONS
Huntington has made loans to its officers, directors, and their associates.
These loans were made in the ordinary course of business under normal credit
terms, including interest rate and collateralization, and do not represent more
than the normal risk of collection. These loans to related parties are summarized
as follows:
(in thousands of dollars) 2002 2001
--------- ---------
BALANCE, BEGINNING OF YEAR $ 133,844 $ 145,761
Loans made 114,694 236,260
Repayments (145,185) (234,011)
Changes due to status of executive officers and directors (7,792) (14,166)
--------- ---------
BALANCE, END OF YEAR $ 95,561 $ 133,844
========= =========
|
NON-PERFORMING ASSETS AND PAST DUE LOANS
At December 31, 2002 and 2001, the loans in non-accrual status and loans past
due 90 days or more and still accruing interest, were as follows:
(in thousands of dollars) 2002 2001
-------- --------
Commercial $ 91,861 $159,637
Real Estate
Construction 5,554 13,885
Commercial 21,211 34,475
Residential 9,443 11,836
-------- --------
TOTAL NON-ACCRUAL LOANS $128,069 $219,833
======== ========
ACCRUING LOANS PAST DUE 90 DAYS OR MORE $ 61,526 $ 76,013
======== ========
|
The amount of interest that would have been recorded under the original terms
for total loans classified as non-accrual or renegotiated was $12.6 million
for 2002, $10.3 million for 2001, and $6.5 million for 2000. Amounts actually
collected and recorded as interest income for these loans totaled $5.1 million,
$4.9 million, and $3.9 million for 2002, 2001, and 2000, respectively.
11. LOAN SECURITIZATIONS
During 2002 and 2001, Huntington sold automobile loans in securitization transactions
totaling $478.0 million and $437.7 million, respectively. Huntington retained
the interest rate risk and the rights to future cash flows arising after the
investors in the securitization trusts have received their contractual return.
These cash flows arise from cash reserve accounts, loan collateral in excess
of the note amounts issued by the securitization trusts, and excess interest
collections. Huntington's interests are subordinate to investors' interests.
The investors and the securitization trusts have no recourse to Huntington's
other assets for failure of debtors to pay when due. At December 31, 2002 and
2001, the fair value of Huntington's retained interest in automobile loan securitizations
was $160.0 million and $159.8 million, respectively. Management periodically
reviews the assumptions underlying these values. If these assumptions change,
the related asset and income would be affected.
Huntington has retained servicing responsibilities and receives annual servicing
fees of 1.0% of the outstanding loan balances. Servicing income, net of amortization
of capitalized servicing assets, amounted to $1.0 million in 2002, $3.6 million
in 2001, and $2.0 million in 2000. The related servicing asset had a value of
$12.7 million at the end of 2002 and $17.6 million at the end of 2001. Impairment
charges of retained interests were $4.0 million in 2002 and $12.2 million in
2001. Impairment on capitalized servicing was $1.5 million in 2002 and $1.3
million in 2001. No impairment of retained interests or capitalized servicing
was recorded in 2000.
Huntington recorded net pre-tax gains of $11.0 million, $6.6 million, and
$4.9 million in 2002, 2001, and 2000, respectively, from automobile loan securitizations.
Gains or losses from securitizations depend in part on the previous carrying
amount of the financial assets involved, which are allocated between the assets
sold and the retained interests based on their relative fair value at the date
of transfer.
Quoted market prices are generally not available for retained interest in
automobile loan securitizations. The key economic assumptions used to measure
the fair value of the retained interest at the time of securitization during
2002 are included in the table below. In 2002 and 2001, the interest rate paid
to transferees on variable rate securities was estimated based on the forward
one-month London Interbank Offered Rate (LIBOR) yield plus the average contractual
spread over LIBOR of 34 basis points.
At December 31, 2002, the assumptions and the sensitivity of the current fair
value of the retained interest to immediate 10% and 20% adverse changes in those
assumptions were:
Decline in fair value
due to
--------------------
10% 20%
adverse adverse
(in millions of dollars) Actual change change
------ -------- -------
Monthly prepayment rate (ABS curve) 1.45 $ 0.7 $ 1.4
Expected annual credit losses 1.55% 2.3 4.6
Discount rate 10.00% 1.8 3.6
Interest rate on variable securities - Forward one-month LIBOR
yield plus 34 basis points 2.7 5.4
|
Caution should be used when reading these sensitivities as a change in an
individual assumption and its impact on fair value is shown independent of changes
in other assumptions. Economic factors are dynamic and may counteract or magnify
sensitivities.
Certain cash flows received from and paid to securitization trusts were:
Twelve Months Ended
December 31,
---------------------
(in million of dollars) 2002 2001
--------- ---------
Collections used by the trusts to purchase new
balances in revolving securitizations $ 480 $ 439
Servicing fees received 12 14
Other cash flows received on retained interest 81 32
Servicing advances -- (3)
Repayments of servicing advances -- 3
|
RESIDENTIAL MORTGAGE LOANS
During 2002, Huntington securitized $386.4 million of residential mortgage
loans and retained all of the resulting securities and, accordingly, reclassified
the securitized amount from loans to securities available for sale.
12. ALLOWANCE FOR LOAN AND LEASE LOSSES
A summary of the transactions in the allowance for loan and lease losses and
details regarding impaired loans and leases follows for the three years ended
December 31:
(in thousands of dollars) 2002 2001 2000
-------------- -------------- --------------
BALANCE, BEGINNING OF YEAR $ 369,332 $ 264,929 $ 273,931
Loan and lease losses (234,352) (174,540) (85,825)
Recoveries of previously charged off loans and leases 37,440 28,271 24,178
-------------- -------------- --------------
Net charge-offs (196,912) (146,269) (61,647)
-------------- -------------- --------------
Provision for loan and lease losses 194,426 257,326 61,464
Allowance of securitized or sold loans (1) (31,462) (6,654) (16,719)
Allowance of assets acquired 1,264 -- 7,900
-------------- -------------- --------------
BALANCE, END OF YEAR $ 336,648 $ 369,332 $ 264,929
============== ============== ==============
RECORDED BALANCE OF IMPAIRED LOANS, AT END OF YEAR (2):
With related allowance for loan and lease losses $ 91,578 $ 168,753 $ 51,693
With no related allowance for loan and lease losses 2,972 2,557 5,261
-------------- -------------- --------------
TOTAL $ 94,550 $ 171,310 $ 56,954
============== ============== ==============
AVERAGE BALANCE OF IMPAIRED LOANS FOR THE YEAR (2) $ 87,286 $ 111,921 $ 33,705
============== ============== ==============
ALLOWANCE FOR LOAN AND LEASE LOSS RELATED
TO IMPAIRED LOANS (2) $ 37,984 $ 65,125 $ 12,944
============== ============== ==============
|
(1) In conjunction with the automobile loan securitizations in 2002, 2001,
and 2000, an allowance for loan and lease losses attributable to the associated
loans sold was included as a component of the loan's carrying value upon their
sale. The allowance associated with the sale of the Florida banking and insurance
operations was $22,297.
(2) Includes impaired commercial and commercial real estate loans with outstanding
balances greater then $500,000. A loan is impaired when it is probable that
Huntington will be unable to collect all amounts due according to the contractual
terms of the loan agreement. Impaired loans are included in non-performing assets.
There was no interest recognized in 2002, 2001, and 2000 on impaired loans while
they were considered impaired.
13. OPERATING LEASE ASSETS
Huntington purchases vehicles, primarily automobiles, for lease to consumers
under operating lease arrangements. These operating lease assets typically require
the lessee to make a fixed monthly rental payment over a specified lease term,
typically from 24 to 66 months. These vehicles, net of accumulated depreciation
are recorded as operating lease assets on the balance sheet. Rental income is
earned by Huntington on the operating lease assets and reported as Non-interest
income. These vehicles are depreciated over the term of the lease to the estimated
fair value of the vehicle at the end of the lease. The depreciation of these
vehicles is reported as a component of Non-interest expense. At the end of the
lease, the vehicle is either purchased by the lessee or returned to Huntington.
The following is a summary of operating lease assets at December 31:
(in thousands) 2002 2001
--------------- ---------------
Cost of Operating Lease Assets $ 3,260,897 $ 3,984,836
Deferred origination fees and costs (51,920) (66,584)
Accumulated depreciation (1,008,452) (912,404)
--------------- ---------------
OPERATING LEASE ASSETS, NET $ 2,200,525 $ 3,005,848
=============== ===============
|
The future lease rental payments due from customers on operating lease assets
at December 31, 2002, totaled $1,254.9 million and are due as follows:
$499.9 million in 2003; $379.1 million in 2004; $241.9 million in 2005; $116.9
million in 2006; and $17.1 million in 2007. Depreciation expense for each of
the years ended December 31, 2002, 2001, and 2000 was $435.8 million, $468.7
million, and $417.7 million, respectively.
14. PREMISES AND EQUIPMENT
At December 31, premises and equipment stated at cost were comprised of the
following:
(in thousands of dollars) 2002 2001
------------- -------------
Land and land improvements $ 56,782 $ 78,272
Buildings 211,700 271,452
Leasehold improvements 123,944 132,267
Equipment 447,374 496,163
------------- -------------
Total premises and equipment 839,800 978,154
Less accumulated depreciation and amortization 498,434 526,118
------------- -------------
NET PREMISES AND EQUIPMENT $ 341,366 $ 452,036
============= =============
|
Depreciation and amortization charged to expense and rental income credited
to occupancy expense for the year ended December 31 were:
(in thousands of dollars) 2002 2001 2000
------------- ------------- -------------
Total depreciation and amortization of premises and equipment $ 46,319 $ 53,805 $ 49,117
============= ============= =============
Rental income credited to occupancy expense $ 15,868 $ 17,662 $ 16,030
============= ============= =============
|
15. Intangible Assets
Goodwill and other intangible assets, net of accumulated amortization, and
related activity for the years ended December 31, 2002 and 2001, was as follows:
(in thousands of dollars) 2002 2001
------------- -------------
BALANCE, BEGINNING OF PERIOD $ 716,054 $ 755,270
Sale of Florida banking and insurance operations (524,105) --
Additions 28,637 3,903
Impairment -- (1,894)
Amortization (2,019) (41,225)
------------- -------------
BALANCE, END OF PERIOD $ 218,567 $ 716,054
============= =============
|
At December 31, goodwill and other intangible assets, net of accumulated amortization,
were comprised of:
(in thousands of dollars) 2002 2001
------------- -------------
Goodwill $ 211,282 $ 649,179
Core deposit -- 58,776
Leasehold 7,285 8,099
------------- -------------
BALANCE, END OF PERIOD $ 218,567 $ 716,054
============= =============
|
The additions totaling $28.6 million for 2002 related to the acquisitions
of LeaseNet Group, Inc., a $90 million leasing company, and Haberer Registered
Investment Advisor, Inc., a Cincinnati-based registered investment advisory
firm. During 2002, Huntington completed the sale of its Florida insurance operations,
the J. Rolfe Davis Insurance Agency, Inc. (JRD), resulting in a $12.2 million
write-off of the remaining associated goodwill. Impairment of $1.9 million in
2001 was related to the exit of an e-commerce business activity and represented
its remaining goodwill balance.
Before the sale of Huntington's operations in Florida, a majority of goodwill
and other intangible assets related to those operations. A substantial portion
of the remaining goodwill is attributable to the previously acquired banking
operations reported under the Regional Banking line of business. The application
of the non-amortization provisions of Statement No. 142 resulted in an increase
in net income per share of $0.05 for 2002. Had no amortization of goodwill,
net of tax, been recorded in the prior year, net income and diluted earnings
per share for 2001 would have been greater by $33.2 million, or $0.13 per share.
16. DEPOSIT LIABILITIES
Core deposits were comprised of interest bearing and non-interest bearing
demand deposits, savings deposits, and other domestic time deposits. Other domestic
time deposits are comprised of certificates of deposit under $100,000 and all
IRA deposits. Brokered time deposits represent funds that Huntington has obtained
by or through a deposit broker. The entire beneficial interest in the deposit
may be held by a single depositor or Huntington may participate in a given deposit
or instrument which the broker has sold to Huntington and other investors. At
December 31, 2002, $787.8 million of brokered deposits were issued in denominations
of $100,000 or more and participated by the broker in shares of $100,000 or
less. Foreign time deposits were comprised of time certificates of deposit issued
by Huntington's foreign offices in denomination of $100,000 or more. Foreign
deposits are interest bearing and all mature in one year or less.
At December 31, deposits were comprised of the following:
(in thousands of dollars) 2002 2001
------------- -------------
Demand deposits
Non-interest bearing $ 3,073,869 $ 3,635,173
Interest bearing 5,374,095 5,723,160
Savings deposits 2,851,158 3,466,305
Other domestic time deposits 3,956,306 5,868,451
------------- -------------
TOTAL CORE DEPOSITS 15,255,428 18,693,089
------------- -------------
Domestic time deposits of $100,000 or more 731,959 1,130,563
Brokered time deposits and negotiable CDs 1,092,754 137,915
Foreign time deposits 419,185 225,737
------------- -------------
TOTAL DEPOSITS $ 17,499,326 $ 20,187,304
============= =============
|
The aggregate amount of certificates of deposit and other time deposits issued
by domestic offices was $5.8 billion and $7.1 billion at December 31, 2002 and
2001, respectively. The contractual maturity of these deposits at the end of
2002 was as follows: $2.56 billion in 2003; $1.38 billion in 2004; $463 million
in 2005; $386 million in 2006; $402 million in 2007; and $596 million thereafter.
Domestic certificates of deposit and other time deposits of $100,000 or more
totaled $1.9 billion at the end of 2002 and $1.1 billion at the end of 2001.
The contractual maturity of these deposits at December 31, 2002, was as follows:
$343 million in three months or less; $182 million after three months through
six months; $212 million after six months through twelve months; and $1,166
million after twelve months.
Demand deposit overdrafts that have been reclassified as loan balances were
$18.2 million and $25.6 million at December 31, 2002 and 2001, respectively.
17. SHORT-TERM BORROWINGS
At December 31, short-term borrowings were comprised of the following:
(in thousands of dollars) 2002 2001
-------------- --------------
Federal funds purchased $ 1,244,637 $ 423,783
Securities sold under agreements to repurchase 1,213,886 1,489,824
Commercial paper 5,031 2,876
Other 77,462 39,443
-------------- --------------
TOTAL SHORT-TERM BORROWINGS $ 2,541,016 $ 1,955,926
============== ==============
|
Information concerning securities sold under agreements to repurchase at December
31 is summarized as follows:
(in thousands of dollars) 2002 2001
------------- -------------
Average balance during the year $ 1,284,406 $ 1,490,209
Average interest rate during the year 1.97% 3.58%
Maximum month-end balance during the year $ 1,488,069 $ 1,620,479
|
Commercial paper is issued by Huntington Bancshares Financial Corporation,
a non-bank subsidiary, with principal and interest guaranteed by Huntington.
18. MEDIUM- AND LONG-TERM DEBT
At December 31, Huntington's medium- and long-term debt consisted of the following:
(in thousands of dollars) 2002 2001
--------------- ---------------
MEDIUM-TERM
The Huntington National Bank (maturing through 2005) $ 1,905,123 $ 1,755,002
Parent company 140,000 40,000
--------------- ---------------
TOTAL MEDIUM-TERM DEBT $ 2,045,123 $ 1,795,002
=============== ===============
LONG-TERM
Parent company:
7 7/8% subordinated notes due 2002 $ -- $ 149,888
The Huntington National Bank:
7 5/8 % subordinated notes due 2003 150,572 157,494
6 3/4% subordinated notes due 2003 102,470 104,942
6 3/5% subordinated notes due 2018 220,824 198,153
Floating rate subordinated notes due 2008 100,000 100,000
8% subordinated notes due 2010 164,812 166,853
--------------- ---------------
Total subordinated notes 738,678 877,330
--------------- ---------------
7 7/8% Class C preferred securities of REIT subsidiary 50,000 50,000
--------------- ---------------
TOTAL LONG-TERM DEBT $ 788,678 $ 927,330
=============== ===============
FEDERAL HOME LOAN BANK ADVANCES DUE THROUGH 2007 $ 1,013,000 $ 17,000
=============== ===============
|
Amounts above are reported net of unamortized discounts and include values
related to hedging with derivative financial instruments. Huntington uses these
derivative instruments, principally interest rate swaps, to match the funding
rates on certain assets by hedging the cash flow variability associated with
certain variable-rate debt by converting the debt to fixed rate and hedging
the fair values of certain fixed-rate debt by converting the debt to variable
rate. See Note 20 for more information regarding such financial instruments.
The weighted-average interest rate for medium-term notes at December 31, 2002
and 2001, was 1.56% and 2.57%, respectively. The parent company issued $100
million of medium-term notes in 2002 that mature in 2004. The parent company
medium-term notes issued in 2001 will mature in the first quarter of 2003.
The weighted-average interest rate for subordinated notes was 6.47% at December
31, 2002 and 6.79% at the end of 2001. The Huntington National Bank's floating
rate subordinated notes were issued in 1998 and are based on three-month LIBOR.
At December 31, 2002, these notes carried an interest rate of
1.88%. The parent company 7 7/8% subordinated notes matured in 2002.
In 2001, Huntington issued $50 million of noncumulative preferred securities
of Huntington Preferred Capital, Inc., a real estate investment trust subsidiary
(REIT), which qualify for regulatory capital. Dividends are payable quarterly
at a fixed rate of 7 7/8% and the shares are not redeemable prior to December
31, 2021.
Long-term advances from the Federal Home Loan Bank had weighted average interest
rates of 1.62% at December 31, 2002, and 6.02% at December 31, 2001. These advances,
which had a combination of fixed and variable interest rates in 2002 and fixed
in 2001, were collateralized by qualifying real estate loans and securities.
The terms of Huntington's medium- and long-term debt obligations and its advances
from the Federal Home Loan Bank contain various restrictive covenants including
limitations on the acquisition of additional debt in excess of specified levels,
dividend payments, and the disposition of subsidiaries. As of December 31, 2002,
Huntington was in compliance with all such covenants.
Medium and long-term debt maturities for the next five years are as follows:
$843.2 million in 2003; $958.0 million in 2004; $610.0 million in 2005; none
in 2006; $900.0 million in 2007; and $535.6 million in 2008 and thereafter.
19. CAPITAL SECURITIES
Company obligated mandatorily redeemable preferred capital securities of subsidiary
trusts holding solely the junior subordinated debentures of the parent company
(Capital Securities) were issued by two business trusts, Huntington Capital
I and II (the Trusts). Huntington Capital I was formed in January 1997 while
Huntington Capital II was formed in June 1998. The proceeds from the issuance
of the Capital Securities and common securities were used to purchase debentures
of the parent company. The Trusts hold junior subordinated debentures of the
parent company, which are the only assets of the Trusts. Both the debentures
and related income statement effects are eliminated in Huntington's consolidated
financial statements.
The parent company has entered into contractual arrangements that, taken collectively
and in the aggregate, constitute a full and unconditional guarantee by the parent
company of the Trusts' obligations under the capital securities issued. The
contractual arrangements guarantee payment of (a) accrued and unpaid distributions
required to be paid on the Capital Securities; (b) the redemption price with
respect to any capital securities called for redemption by Huntington Capital
I or II; and (c) payments due upon voluntary or involuntary liquidation, winding-up,
or termination of Huntington Capital I or II. The Capital Securities and common
securities, and related debentures are summarized as follows:
DECEMBER 31, 2002
Interest Rate of Maturity of
Capital Securities and Capital Securities
(in thousands of dollars) Securities Debentures and Debentures
---------- ---------------- ------------------
Huntington Capital I $ 200,000 LIBOR + .70%(1) 02/01/2027
Huntington Capital II 100,000 LIBOR + .625%(2) 06/15/2028
----------
TOTAL CAPITAL SECURITIES $ 300,000
==========
|
(1) Variable effective rate at December 31, 2002 and 2001, of 2.46% and
2.97%, respectively.
(2) Variable effective rate at December 31, 2002 and 2001, of 2.04% and
2.50%, respectively.
The debentures held by Huntington Capital I and II qualify as Tier 1 capital
under Federal Reserve Bank guidelines.
20. DERIVATIVE FINANCIAL INSTRUMENTS
Huntington uses a variety of derivative financial instruments, principally
interest rate swaps, in its asset and liability management activities to protect
against the risk of adverse price or interest rate movements on the value of
certain assets and liabilities and on future cash flows. These instruments provide
Huntington with flexibility in adjusting its sensitivity to changes in interest
rates without exposure to loss of principal and higher funding requirements.
By using derivatives to manage interest rate risk, the effect is a smaller,
more efficient balance sheet, with a lower wholesale funding requirement and
a higher net interest margin, but with a comparable level of net interest revenue
and return on equity. All derivatives are reflected at fair value in Huntington's
statements of financial condition.
Market risk, which is the possibility that economic value of net assets or net
interest income will be adversely affected by changes in interest rates or other
economic factors, is managed through the use of derivatives. Derivatives also
meet customers' financing needs but, like other financial instruments, contain
an element of credit risk, which is the possibility that Huntington will incur
a loss because a counterparty fails to meet its contractual obligations. Notional
values of interest rate swaps and other off-balance sheet financial instruments
significantly exceed the credit risk associated with these instruments and represent
contractual balances on which calculations of amounts to be exchanged are based.
Credit exposure is limited to the sum of the aggregate fair value of positions
that have become favorable to Huntington, including any accrued interest receivable
due from counterparties. Potential credit losses are minimized through careful
evaluation of counterparty credit standing, selection of counterparties from a
limited group of high quality institutions, collateral agreements, and other contract
provisions.
ASSET AND LIABILITY MANAGEMENT
Derivatives that are used in asset and liability management are classified
as fair value hedges or cash flow hedges and are required to meet specific criteria.
To qualify as a hedge, the hedge relationship is designated and formally documented
at inception, detailing the particular risk management objective and strategy
for the hedge. This includes identifying the item and risk being hedged, the
derivative being used, and how the effectiveness of the hedge is being assessed.
A derivative must be highly effective in accomplishing the objective of offsetting
either changes in fair value or cash flows for the risk being hedged. Correlation
is evaluated on a retrospective and prospective basis using quantitative measures.
If a hedge relationship is found to be ineffective, it no longer qualifies as
a hedge and any excess gains or losses attributable to ineffectiveness, as well
as subsequent changes in fair value, are recognized in other income.
For fair value hedges, Huntington effectively converts specified fixed-rate
deposits, short-term borrowings, and long-term debt to variable rate obligations
by entering into interest rate swap contracts whereby fixed-rate interest is
received in exchange for variable-rate interest without the exchange of the
contract's underlying notional amount. Forward contracts, used primarily by
Huntington in connection with its mortgage banking activities, settle in cash
at a specified future date based on the differential between agreed interest
rates applied to a notional amount. The changes in fair value of the hedged
item and the hedging instrument are reflected in current earnings. Huntington
recognized an insignificant loss in 2002 and no gain or loss in 2001 in connection
with the ineffective portion of its fair value hedging instruments. Furthermore,
there were no gains or losses on derivatives designated as fair value hedges
that were excluded from the assessment of effectiveness during 2002 and 2001.
For cash flow hedges, Huntington also entered into interest rate swap contracts
that pay fixed-rate interest in exchange for the receipt of variable-rate interest
without the exchange of the contract's underlying notional amount, which effectively
converted a portion of its floating-rate debt to fixed-rate. This reduced the
potentially adverse impact of increases in interest rates on future interest
expense. In like fashion, Huntington effectively converted certain prime-based
and LIBOR-based commercial loans to fixed-rate by entering into contracts that
swap variable-rate interest for fixed-rate interest over the life of the contracts.
Huntington also used interest rate swaps to manage the interest rate risk
associated with its retained interest in a securitization trust. This retained
interest provides Huntington with the right to receive any future cash flows
arising after the investors in the securitization trust have received their
contractual return. As the trust holds fixed rate indirect automobile loans
and is funded with floating rate notes, the future cash flows associated with
the retained interest will vary with interest rates. The interest rate swaps
used convert the variable portion of these future cash flows to a fixed cash
flow.
To the extent these derivatives are effective in offsetting the variability
of the hedged cash flows, changes in the derivatives' fair value will not be
included in current earnings but are reported as a component of Accumulated
Other Comprehensive Income in Shareholders' Equity. These changes in fair value
will be included in earnings of future periods when earnings are also affected
by the changes in the hedged cash flows. To the extent these derivatives are
not effective, changes in their fair values are immediately included in earnings.
During 2002, Huntington recognized a net loss in connection with the ineffective
portion of its cash flow hedging instruments and a net gain in 2001. The amounts
were classified in other non-interest income and were insignificant in both
years. No amounts were excluded from the assessment of effectiveness during
2002 and 2001 for derivatives designated as cash flow hedges.
Derivatives used to manage Huntington's interest rate risk at December 31, 2002,
are shown in the table below:
Weighted-Average
Average Rate
Notional Maturity Fair ----------------------------------
(in thousands of dollars) Value (years) Value Receive Pay
--------------- --------------- --------------- --------------- ---------------
Asset conversion swaps
Receive fixed - generic $ 750,000 3.6 $ 48,376 5.12% 1.47%
Pay fixed - generic 750,000 0.9 (12,882) 1.42% 3.65%
--------------- --------------- --------------- --------------- ---------------
Total asset conversion swaps 1,500,000 2.3 35,494 3.27% 2.56%
--------------- --------------- --------------- --------------- ---------------
Liability conversion swaps
Receive fixed - generic 400,000 5.9 24,946 6.97% 1.81%
Receive fixed - callable 628,500 11.0 (6,020) 5.59% 1.51%
Pay fixed - generic 1,791,000 1.7 (20,653) 1.49% 3.48%
Receive fixed - forwards 10,000 N/A -- N/A N/A
Pay fixed - forwards 650,000 N/A (20,717) N/A N/A
--------------- --------------- --------------- --------------- ---------------
Total liability conversion swaps 3,479,500 4.4 (22,444) 3.18% 2.80%
--------------- --------------- --------------- --------------- ---------------
TOTAL SWAP PORTFOLIO $ 4,979,500 3.6 $ 13,050 3.21% 2.72%
=============== =============== =============== =============== ===============
|
The fair value of the swap portfolio used for asset and liability management
was $3.7 million at December 31, 2001. These values must be viewed in the context
of the overall financial structure of Huntington, including the aggregate net
position of all on- and off-balance sheet financial instruments.
As is the case with cash securities, the market value of interest rate swaps
is largely a function of the financial market's expectations regarding the future
direction of interest rates. Accordingly, current market values are not necessarily
indicative of the future impact of the swaps on net interest income. This will
depend, in large part, on the shape of the yield curve as well as interest rate
levels. Management made no assumptions regarding future changes in interest
rates with respect to the variable rate information presented in the table above.
The next table represents the gross notional value of derivatives used to
manage interest rate risk at December 31, 2002, identified by the underlying
interest rate-sensitive instruments. The notional amounts shown in the tables
above and below should be viewed in the context of Huntington's overall interest
rate risk management activities to assess the impact on the net interest margin.
The hedges associated with medium-term notes, Federal Home Loan Bank (FHLB)
advances, and deposits below include $600.0 million, $50.0 million, and $10.0
million in notional value of forward-starting swaps, respectively.
Fair Value Cash Flow
(in thousands of dollars) Hedges Hedges Total
--------------- --------------- ---------------
Instruments associated with:
Loans $ -- $ 750,000 $ 750,000
Securities available for sale -- 750,000 750,000
Deposits 638,500 -- 638,500
FHLB Advances -- 400,000 400,000
Medium-term notes -- 1,890,000 1,890,000
Subordinated notes and other long-term debt 400,000 151,000 551,000
--------------- --------------- ---------------
TOTAL NOTIONAL VALUE AT DECEMBER 31, 2002 $ 1,038,500 $ 3,941,000 $ 4,979,500
=============== =============== ===============
|
The estimated amount of the existing unrealized gains and losses to be reclassified
to pre-tax earnings from Accumulated Other Comprehensive Income within the next
twelve months is expected to be a net loss of $11.4 million.
Huntington regularly enters into collateral agreements as part of the underlying
derivative agreements with its counterparties to mitigate the credit risk associated
with both the derivatives used for asset and liability management and used in
trading activities. At December 31, 2002 and 2001, Huntington's aggregate credit
risk associated with these derivatives, net of collateral that has been pledged
by the counterparty, was $15.9 million and $45.0 million, respectively. The
credit risk associated with interest rate swaps is calculated after considering
master netting agreements.
Huntington entered into these derivative financial instruments to alter the
interest rate risk embedded in its assets and liabilities. Consequently, net
amounts receivable or payable on contracts hedging either interest earning assets
or interest bearing liabilities were accrued as an adjustment to either interest
income or interest expense. The net amount resulted in interest income exceeding
interest expense by $48.4 million in 2002, and interest expense exceeding interest
income by $6.2 million and $12.7 million in 2001 and 2000, respectively.
DERIVATIVES USED IN TRADING ACTIVITIES
Huntington offers various derivative financial instruments to enable customers
to meet their financing and investing objectives and for risk management purposes.
Derivative financial instruments held in Huntington's trading portfolio during
2002 and 2001 consisted predominantly of interest rate swaps, but also included
interest rate caps, floors, and futures, as well as foreign exchange options.
Interest rate options grant the option holder the right to buy or sell an underlying
financial instrument for a predetermined price before the contract expires.
Interest rate futures are commitments to either purchase or sell a financial
instrument at a future date for a specified price or yield and may be settled
in cash or through delivery of the underlying financial instrument. Interest
rate caps and floors are option-based contracts that entitle the buyer to receive
cash payments based on the difference between a designated reference rate and
a strike price, applied to a notional amount. Written options, primarily caps,
expose Huntington to market risk but not credit risk. Purchased options contain
both credit and market risk. They are used to manage fluctuating interest rates
as exposure to loss from interest rate contracts changes.
Supplying these derivatives to customers provides Huntington with fee income.
These instruments are carried at fair value with gains and losses reflected
in other non-interest income. Total trading revenue for customer accommodation
was $6.4 million in 2002, $8.4 million in 2001, and $854,000 in 2000. The total
notional value of derivative financial instruments used by Huntington on behalf
of customers (for which the related interest rate risk is offset by third parties)
was $3.2 billion at the end of 2002 and $2.0 billion at the end of the prior
year. Huntington's credit risk from interest rate swaps used for trading purposes
was $92.1 million and $36.2 million at the same dates.
In connection with its securitization activities, Huntington purchased interest
rate caps with a notional value totaling $1 billion. These purchased caps were
assigned to the securitization trust for the benefit of the security holders.
Interest rate caps were also sold totaling $1 billion outside the securitization
structure. Both the purchased and sold caps are marked to market through income
in accordance with accounting principles generally accepted in the United States.
21. STOCK-BASED COMPENSATION
Huntington sponsors nonqualified and incentive stock option plans. These plans
provide for the granting of stock options to officers and other employees. Huntington's
Board of Directors has approved all of the plans. Shareholders have approved
each of the plans, except for the broad-based Employee Stock Incentive Plan.
Approximately 18.1 million shares have been authorized under the plans, of which
7.7 million were available at December 31, 2002 for future grants. Options that
were granted in the most recent five years vest ratably over three years or
when other conditions are met while those granted in 1994 through 1997 vested
ratably over four years. All grants preceding 1994 became fully exercisable
after one year. All options granted have a maximum term of ten years.
The fair value of the options granted was estimated at the date of grant using
a Black-Scholes option-pricing model. Huntington's stock option activity and related
information for each of the recent three years ended December 31 is summarized
below:
2002 2001 2000
-------------------------- -------------------------- --------------------------
WEIGHTED- Weighted- Weighted-
AVERAGE Average Average
EXERCISE Exercise Exercise
(in thousands, except per share amounts) Options PRICE Options Price Options Price
----------- ----------- ----------- ----------- ----------- -----------
OUTSTANDING AT BEGINNING OF YEAR 14,649 $ 18.70 9,482 $ 19.26 7,719 $ 20.07
Granted 5,511 18.78 6,820 17.46 2,526 16.10
Exercised (887) 12.79 (606) 9.30 (298) 8.15
Forfeited/expired (1,249) 19.89 (1,047) 21.13 (465) 22.69
----------- ----------- ----------- ----------- ----------- -----------
OUTSTANDING AT END OF YEAR 18,024 $ 18.97 14,649 $ 18.70 9,482 $ 19.26
=========== =========== =========== =========== =========== ===========
EXERCISABLE AT END OF YEAR 8,352 $ 19.62 7,346 $ 19.34 5,399 $ 18.18
=========== =========== =========== =========== =========== ===========
WEIGHTED-AVERAGE FAIR VALUE OF OPTIONS
GRANTED DURING THE YEAR $ 5.18 $ 4.55 $ 5.58
=========== =========== ===========
|
Additional information regarding options outstanding as of December 31, 2002,
is as follows:
(in thousands, except per share amounts)
Options Outstanding Exercisable Options
--------------------------------------------- -----------------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Range of Contractual Exercise Exercise
Exercise Prices Shares Life (Years) Price Shares Price
---------------- ------------- ------------- ------------- ------------- -------------
$6.64 to $10.50 196 0.1 $ 10.16 196 $ 10.16
$10.51 to $15.50 3,629 6.1 14.54 3,049 14.47
$15.51 to $20.50 11,358 8.7 18.60 2,266 18.46
$20.51 to $25.50 435 5.2 23.81 435 23.81
$25.51 to $28.35 2,406 6.1 27.26 2,406 27.26
------------- ------------- ------------- ------------- -------------
TOTAL 18,024 7.7 $ 18.97 8,352 $ 19.62
============= ============= ============= ============= =============
|
The following pro forma disclosures for net income and earnings per diluted
common share is presented as if Huntington had applied the fair value method
of accounting of Statement No. 123, Accounting for Stock-Based Compensation,
in measuring compensation costs for stock options. The fair values of the stock
options granted were estimated using the Black-Scholes option-pricing model.
This model assumes that the estimated fair value of the options is amortized
over the options' vesting periods and the compensation costs would be included
in personnel expense on the income statement. The following table also includes
the weighted-average assumptions that were used in the option-pricing model
for options granted in each of the last three years:
(in millions of dollars, except per share amounts) 2002 2001 2000
------------- ------------- -------------
ASSUMPTIONS
Risk-free interest rate 4.12% 5.05% 6.14%
Expected dividend yield 3.34% 4.99% 4.37%
Expected volatility of Huntington's common stock 33.8% 41.0% 45.1%
PRO FORMA RESULTS
Net income, as reported $ 323.7 $ 134.8 $ 322.4
Less pro forma expense related to options granted 12.7 12.1 10.3
------------- ------------- -------------
PRO FORMA NET INCOME $ 311.0 $ 122.7 $ 312.1
============= ============= =============
NET INCOME PER COMMON SHARE:
Basic, as reported $ 1.34 $ 0.54 $ 1.30
Basic, pro forma 1.28 0.49 1.25
Diluted, as reported 1.33 0.54 1.29
Diluted, pro forma 1.27 0.49 1.25
|
22. BENEFIT PLANS
Huntington sponsors the Huntington Bancshares Retirement Plan (the Plan),
a non-contributory defined benefit pension plan covering substantially all employees.
The Plan provides benefits based upon length of service and compensation levels.
The funding policy of Huntington is to contribute an annual amount that is at
least equal to the minimum funding requirements but not more than that deductible
under the Internal Revenue Code.
At December 31, 2002 and 2001, The Huntington National Bank, as trustee, held
all Plan assets. The Plan assets consisted of investments in a variety of Huntington
mutual funds and Huntington common stock as follows:
Fair Value
-----------------------------
(in thousands of dollars) 2002 2001
------------- -------------
Huntington mutual funds $ 238,333 $ 214,357
Huntington common stock 12,019 19,637
|
The number of shares of Huntington common stock held by the Plan was 642,364
at December 31, 2002 and 1,142,364 at the end of the prior year. Dividends received
by the Plan during 2002 and 2001 were $6.1 million and $7.7 million, respectively.
Huntington common stock comprised approximately 4% of the Plan's assets at the
end of 2002 and approximately 8% at the end of 2001. The Plan has acquired and
held Huntington common stock in compliance at all times with Section 407 of
the Employee Retirement Income Security Act of 1978.
In addition, Huntington has an unfunded defined benefit post-retirement plan
that provides certain health care and life insurance benefits to retired employees
who have attained the age of 55 and have at least 10 years of vesting service
under this plan. For any employee retiring on or after January 1, 1993, post-retirement
healthcare benefits are based upon the employee's number of months of service
and are limited to the actual cost of coverage. Life insurance benefits are
a percentage of the employee's base salary at the time of retirement, with a
maximum of $50,000 of coverage.
The following table reconciles the funded status of the Plan and the post-retirement
benefit plan at the September 30 measurement dates with the amounts recognized
in the consolidated balance sheets at December 31:
PENSION POST-RETIREMENT
BENEFITS BENEFITS
------------------------------- -------------------------------
(in thousands of dollars) 2002 2001 2002 2001
------------- ------------- ------------- -------------
PROJECTED BENEFIT OBLIGATION AT
BEGINNING OF MEASUREMENT YEAR $ 212,935 $ 209,954 $ 51,430 $ 46,119
Changes due to:
Service cost 8,263 8,394 1,126 1,060
Interest cost 15,458 14,675 3,603 3,435
Benefits paid (6,561) (16,008) (3,456) (3,810)
Curtailment -- (2,475) (1,472) --
Plan amendments 1,423 1,785 -- --
Actuarial assumptions 34,297 (3,390) 2,321 4,626
------------- ------------- ------------- -------------
Total changes 52,880 2,981 2,122 5,311
------------- ------------- ------------- -------------
PROJECTED BENEFIT OBLIGATION AT END OF MEASUREMENT YEAR 265,815 212,935 53,552 51,430
------------- ------------- ------------- -------------
FAIR VALUE OF PLAN ASSETS AT BEGINNING
OF MEASUREMENT YEAR 226,959 206,936 -- --
Changes due to:
Actual return on plan assets (16,908) (5,969) -- --
Employer contributions 55,000 42,000 -- --
Benefits paid (6,561) (16,008) -- --
------------- ------------- ------------- -------------
Total changes 31,531 20,023 -- --
------------- ------------- ------------- -------------
FAIR VALUE OF PLAN ASSETS AT END OF MEASUREMENT YEAR 258,490 226,959 -- --
------------- ------------- ------------- -------------
Projected benefit obligation (greater) less
than plan assets (7,325) 14,024 (53,552) (51,430)
Unrecognized net actuarial loss (gain) 98,275 26,068 1,924 (399)
Unrecognized prior service cost 1,791 183 5,043 6,450
Unrecognized transition (asset) liability,
net of amortization (256) (540) 11,040 13,868
------------- ------------- ------------- -------------
PREPAID (ACCRUED) BENEFIT COSTS $ 92,485 $ 39,735 $ (35,545) $ (31,511)
============= ============= ============= =============
WEIGHTED-AVERAGE ASSUMPTIONS AT SEPTEMBER 30:
Discount rate 6.75% 7.50% 6.75% 7.50%
Expected return on plan assets 8.50% 9.75% N/A N/A
Rate of compensation increase 5.00% 5.00% N/A N/A
|
The following table shows the components of pension cost recognized in the
most recent three years:
PENSION BENEFITS POST-RETIREMENT BENEFITS
------------------------------------ -----------------------------------
(in thousands of dollars) 2002 2001 2000 2002 2001 2000
-------- -------- -------- -------- -------- --------
Service cost $ 8,263 $ 8,394 $ 10,241 $ 1,126 $ 1,060 $ 1,544
Interest cost 15,458 14,675 15,509 3,603 3,435 3,506
Expected return on plan assets (26,416) (22,821) (18,947) -- -- --
Amortization of transition asset (265) (259) (274) 1,104 1,261 1,261
Amortization of prior service cost (185) (305) (318) 605 693 693
Curtailments 2,022 -- -- 2,526 -- --
Settlements 3,374 471 107 -- -- --
Recognized net actuarial gain -- (535) -- -- (31) --
-------- -------- -------- -------- -------- --------
BENEFIT COST $ 2,250 $ (380) $ 6,318 $ 8,964 $ 6,418 $ 7,004
======== ======== ======== ======== ======== ========
|
The curtailment reflected above related to the sale of the Florida banking
and insurance operations. This expense was recognized in Huntington's results
of operations in 2002. Management expects pension benefit cost to approximate
$6.4 million and post-retirement benefits cost to approximate $6.3 million for
2003.
The 2003 health care cost trend rate was projected to be 13.35% for pre-65 participants
and 13.53% for post-65 participants compared with an estimate of 9.00% for both
in 2001. These rates are assumed to decrease gradually until they reach 5.09%
for pre-65 participants and 5.17% for post-65 participants in the year 2017 and
remain at that level thereafter. The increase in the health care cost trend rate,
a decline in the discount rate from 7.50% to
6.75%, and a decrease in the Medicare HMO participation rate from 12% to 0% all
increased the benefit cost and benefit liability. This increase was offset by
a decrease in the number of plan participants. Huntington updated the immediate
health care cost trend rate assumption based on current market data and Huntington's
claims experience. This trend rate is expected to decline over time to a trend
level consistent with medical inflation and long-term economic assumptions.
The assumed health care cost trend rate has a significant effect on the amounts
reported. A one-percentage point increase would increase service and interest
costs and the post-retirement benefit obligation by $83,000 and $1.0 million,
respectively. A one-percentage point decrease would reduce service and interest
costs by $81,000 and the post-retirement benefit obligation by $929,000.
Huntington also sponsors other retirement plans. One of those plans is an
unfunded Supplemental Executive Retirement Plan. This plan is a nonqualified
plan that provides certain former officers of Huntington and its subsidiaries
with defined pension benefits in excess of limits imposed by federal tax law.
At December 31, 2002 and 2001, the accrued pension liability for this plan totaled
$14.3 million and $14.2 million, respectively. Pension expense for the plan
was $1.3 million in 2002, $2.1 million in 2001, and $2.5 million in 2000. Other
plans, including plans assumed in various past acquisitions, are unfunded, nonqualified
plans that provide certain active and former officers of Huntington and its
subsidiaries nominated by Huntington's compensation committee with deferred
compensation, post-employment, and/or defined pension benefits in excess of
limits imposed by federal tax law. These plans had a collective accrued liability
of $15.2 million and $14.5 million at December 31, 2002 and 2001, respectively.
Expense for these plans was $2.1 million in 2002, $1.8 million in 2001, and
$1.2 million for 2000. At December 31, 2002, a minimum pension asset of $1.4
million and a reduction in Accumulated Other Comprehensive Income of $0.3 million
($0.2 million after-tax) was recorded collectively for these plans.
Huntington recorded a minimum pension liability associated with a supplemental
income retirement plan and various other benefit plans based on its actuarial
valuation dated September 30, 2002. The minimum pension liability was recognized
because the plan's accumulated benefit obligation exceeded the fair value of
its assets. A pension asset of $1.4 million was recorded equal to the plan's
unrecognized prior service cost. The amount of the minimum pension liability
that exceeded the pension asset, which represented a net loss not yet recognized
as a net period pension cost, amounted to $0.2 million and was recorded as a
reduction of equity, net of applicable taxes, as a separate component of accumulated
other comprehensive income.
Huntington has a defined contribution plan that is available to eligible employees.
Matching contributions by Huntington equal 100% on the first 3% and 50% on the
next 2% of participant elective deferrals. The cost of providing this plan was
$8.4 million in 2002, $8.7 million in 2001, and $7.9 million in 2000. The number
of shares of Huntington common stock held by this plan was 8,812,405 at December
31, 2002 and 10,303,595 at the end of the prior year. The market value of these
shares was $164.9 million and $177.1 million at the same respective dates. Dividends
received by the plan during 2002 were $11.3 million and $8.8 million during
2001.
23. COMMITMENTS AND CONTINGENT LIABILITIES
In the ordinary course of business, Huntington makes various commitments to
extend credit that are not reflected in the financial statements. The contract
amount of these financial agreements at December 31 were:
(in millions of dollars) 2002 2001
------ ------
CONTRACT AMOUNT REPRESENTS CREDIT RISK
Commitments to extend credit
Commercial $4,435 $4,345
Consumer 3,607 4,283
Commercial real estate 577 715
Standby letters of credit 880 939
Commercial letters of credit 71 175
|
COMMITMENTS TO EXTEND CREDIT
Commitments to extend credit generally have short-term, fixed expiration dates,
are variable rate, and contain clauses that permit Huntington to terminate or
otherwise renegotiate the contracts in the event of a significant deterioration
in the customer's credit quality. These arrangements normally require the payment
of a fee by the customer, the pricing of which is based on prevailing market
conditions, credit quality, probability of funding, and other relevant factors.
Since many of these commitments are expected to expire without being drawn upon,
the contract amounts are not necessarily indicative of future cash requirements.
The interest rate risk arising from these financial instruments is insignificant
as a result of their predominantly short-term, variable rate nature.
Standby letters of credit are conditional commitments issued by Huntington
to guarantee the performance of a customer to a third party. These guarantees
are primarily issued to support public and private borrowing arrangements, including
commercial paper, bond financing, and similar transactions. Most of these arrangements
mature within two years. Approximately 53% of standby letters of credit are
collateralized, and nearly 95% are expected to expire without being drawn upon.
In 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others (the Interpretation). The Interpretation will change current practice
in the accounting for, and disclosure of, guarantees. For Huntington, these
changes apply to its standby letters of credit. The Interpretation requires
certain guarantees to be recorded at fair value, which differs from the current
practice of recording a liability generally when a loss is probable and reasonably
estimable, as those terms are defined in Statement No. 5, Accounting for Contingencies.
The Interpretation's initial recognition and initial measurement provisions
are applicable on a prospective basis to guarantees issued or modified after
December 31, 2002. Huntington estimates that the implementation of this new
Interpretation will be immaterial to Huntington's results of operations in 2003.
Commercial letters of credit represent short-term, self-liquidating instruments
that facilitate customer trade transactions and have maturities of no longer
than ninety days. The merchandise or cargo being traded normally secures these
instruments.
COMMITMENTS TO SELL LOANS
Huntington entered into forward contracts, relating to its mortgage banking
business. At December 31, 2002 and 2001, Huntington had commitments to sell
residential real estate loans of $782.0 million and $677.4 million, respectively.
These contracts mature in less than one year. In addition, Huntington had a
commitment to sell automobile loans of $38.8 million and $38.2 million at December
31, 2002 and 2001, respectively, under the terms of its securitization agreement.
LITIGATION
In the ordinary course of business, there are various legal proceedings pending
against Huntington and its subsidiaries. In the opinion of management, the aggregate
liabilities, if any, arising from such proceedings are not expected to have
a material adverse effect on Huntington's consolidated financial position.
COMMITMENTS UNDER CAPITAL AND OPERATING LEASE OBLIGATIONS
At December 31, 2002, Huntington and its subsidiaries were obligated under
noncancelable leases for land, buildings, and equipment. Many of these leases
contain renewal options, and certain leases provide options to purchase the
leased property during or at the expiration of the lease period at specified
prices. Some leases contain escalation clauses calling for rentals to be adjusted
for increased real estate taxes and other operating expenses, or proportionately
adjusted for increases in the consumer or other price indices.
The future minimum rental payments required under operating leases that have
initial or remaining noncancelable lease terms in excess of one year as of December
31, 2002 were $35.1 million in 2003, $33.1 million in 2004, $29.7 million in
2005, $27.6 million in 2006, $26.2 million in 2007, and $218.6 million thereafter.
Total minimum lease payments have not been reduced by minimum sublease rentals
of $116.7 million due in the future under noncancelable subleases. The rental
expense for all operating leases was $38.7 million for 2002 compared with $47.5
million for 2001 and $49.6 million in 2000. Huntington had no material obligations
under capital leases.
24. INCOME TAXES
The following is a summary of the provision for income taxes:
(in thousands of dollars) 2002 2001 2000
--------- --------- ---------
Currently (receivable) payable
Federal $ 102,256 $(130,917) $(107,591)
State -- -- 467
--------- --------- ---------
Total current 102,256 (130,917) (107,124)
--------- --------- ---------
Deferred tax expense
Federal 96,718 91,598 233,423
State -- -- --
--------- --------- ---------
Total deferred 96,718 91,598 233,423
--------- --------- ---------
Income taxes $ 198,974 $ (39,319) $ 126,299
========= ========= =========
|
Tax expense associated with securities transactions included in the above
amounts was $1.7 million in 2002, $0.3 million in 2001, and $15.9 million in
2000.
The following is a reconcilement of income tax expense to the amount computed
at the statutory rate of 35%:
(in thousands of dollars) 2002 2001 2000
--------- --------- ---------
Income tax expense computed at the statutory rate $ 182,947 $ 33,416 $ 157,051
Increases (decreases):
Tax-exempt income (18,621) (18,486) (18,619)
Asset securitization activities (8,244) (21,527) (10,970)
Subsidiary capital activities -- (32,500) --
Nondeductible goodwill 52,500 5,729 5,223
Other, net (9,608) (5,951) (6,386)
--------- --------- ---------
INCOME TAXES $ 198,974 $ (39,319) $ 126,299
========= ========= =========
|
Income taxes include a benefit from Bank owned life insurance, included in
tax-exempt income in the previous table, of $15.1 million, $14.4 million and
$13.8 million for 2002, 2001, and 2000, respectively. The significant components
of deferred assets and liabilities at December 31, are as follows:
(in thousands of dollars) 2002 2001
-------- --------
Deferred tax assets:
Allowance for loan losses $ 76,980 $ 82,617
Pension and other employee benefits -- 13,641
Alternative minimum tax 18,308 28,784
Other 155,252 128,030
-------- --------
TOTAL DEFERRED TAX ASSETS 250,540 253,072
-------- --------
Deferred tax liabilities:
Lease financing 717,643 495,133
Undistributed income of subsidiary 28,123 174,528
Pension and other employee benefits 16,480 --
Mortgage servicing rights 12,308 12,967
Unrealized gains on securities available for sale 30,129 15,868
Other 125,516 118,755
-------- --------
TOTAL DEFERRED TAX LIABILITIES 930,199 817,251
-------- --------
NET DEFERRED TAX LIABILITY $679,659 $564,179
======== ========
|
At December 31, 2002, Huntington had an alternative minimum tax credit carryforward
for income tax purposes of $18.3 million. During 2002, the net deferred tax
liability was increased by $14.2 million for the tax effect of unrealized gains
on securities available for sale and $4.5 million from the acquisition of LeaseNet.
25. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the unaudited quarterly results of operations,
as restated, for the years ended December 31, 2002 and 2001:
(in thousands of dollars, except per share data) FIRST SECOND THIRD FOURTH
--------- --------- --------- ---------
2002
INTEREST INCOME $ 328,502 $ 311,176 $ 324,177 $ 329,340
INTEREST EXPENSE 149,633 130,915 132,912 130,161
--------- --------- --------- ---------
NET INTEREST INCOME 178,869 180,261 191,265 199,179
--------- --------- --------- ---------
PROVISION FOR LOAN AND LEASE LOSSES 39,010 49,876 54,304 51,236
GAIN ON SALE OF FLORIDA OPERATIONS 182,470 -- -- --
MERCHANT SERVICES GAIN -- -- 24,550 --
SECURITIES GAINS 457 966 1,140 2,339
NON-INTEREST INCOME 299,606 287,748 272,912 269,516
NON-INTEREST EXPENSE 345,412 323,746 319,496 336,520
RESTRUCTURE CHARGES (RELEASES) 56,184 -- -- (7,211)
--------- --------- --------- ---------
INCOME BEFORE INCOME TAXES 220,796 95,353 116,067 90,489
INCOME TAXES 125,321 24,375 28,052 21,226
--------- --------- --------- ---------
NET INCOME $ 95,475 $ 70,978 $ 88,015 $ 69,263
========= ========= ========= =========
NET INCOME PER COMMON SHARE -- BASIC $ 0.38 $ 0.29 $ 0.37 $ 0.30
NET INCOME PER COMMON SHARE -- DILUTED $ 0.38 $ 0.29 $ 0.36 $ 0.29
|
(in thousands of dollars, except per share data) FIRST SECOND THIRD FOURTH
--------- --------- --------- ---------
2001
Interest income $ 444,924 $ 427,265 $ 407,138 $ 375,462
Interest expense 274,003 250,011 228,060 187,427
--------- --------- --------- ---------
Net interest income 170,921 177,254 179,078 188,035
--------- --------- --------- ---------
Provision for loan and lease losses 22,754 99,444 34,053 101,075
Securities gains (losses) 2,078 (2,503) 1,059 89
Non-interest income 272,089 304,184 311,406 311,540
Non-interest expense 362,694 376,910 373,806 369,060
Restructure charges -- 13,997 50,817 15,143
--------- --------- --------- ---------
Income (loss) before income taxes 59,640 (11,416) 32,867 14,386
Income taxes 13,000 (12,548) 886 (40,657)
--------- --------- --------- ---------
Net income $ 46,640 $ 1,132 $ 31,981 $ 55,043
========= ========= ========= =========
Net Income Per Common Share -- Basic $ 0.19 $ 0.00 $ 0.13 $ 0.22
Net Income Per Common Share -- Diluted $ 0.19 $ 0.00 $ 0.13 $ 0.22
|
26. REGULATORY MATTERS
Huntington and its bank subsidiary, The Huntington National Bank, are subject
to various regulatory capital requirements administered by federal and state
banking agencies. These requirements involve qualitative judgments and quantitative
measures of assets, liabilities, capital amounts, and certain off-balance sheet
items as calculated under regulatory accounting practices. Failure to meet minimum
capital requirements can initiate certain actions by regulators that, if undertaken,
could have a material adverse effect on Huntington's and The Huntington National
Bank's financial statements. Applicable capital adequacy guidelines require
minimum ratios of 4.00% for Tier 1 Risk-based Capital, 8.00% for Total Risk-based
Capital, and 4.00% for Tier 1 Leverage Capital. To be considered well capitalized
under the regulatory framework for prompt corrective action, the ratios must
be at least 6.00%, 10.00%, and 5.00%, respectively.
As of December 31, 2002 and 2001, Huntington met all capital adequacy requirements
and had regulatory capital ratios in excess of the levels established for well-capitalized
institutions. The Huntington National Bank (the Bank) met the minimum capital
standards at December 31, 2002 and 2001. The period-end capital amounts and
capital ratios of Huntington and its bank subsidiary are as follows:
TIER 1 TOTAL CAPITAL TIER 1 LEVERAGE
-------------------- -------------------- --------------------
(in millions of dollars) 2002 2001 2002 2001 2002 2001
------- ------- ------- ------- ------- -------
HUNTINGTON BANCSHARES INCORPORATED
Amount $ 2,254 $ 1,946 $ 3,041 $ 2,793 $ 2,254 $ 1,946
Ratio 8.34% 7.02% 11.25% 10.07% 8.51% 7.16%
THE HUNTINGTON NATIONAL BANK
Amount $ 1,535 $ 1,633 $ 2,613 $ 2,766 $ 1,535 $ 1,633
Ratio 5.67% 5.85% 9.65% 9.90% 5.88% 6.07%
|
Tier 1 Risk-Based Capital consists of total equity plus qualifying capital
securities and minority interest, less unrealized gains and losses accumulated
in other comprehensive income, and non-qualifying intangible and servicing assets.
Total Risk-Based Capital is Tier 1 Risk-Based Capital plus qualifying subordinated
notes and allowable allowance for loan and lease losses (limited to 1.25% of
total risk-weighted assets). Tier 1 Leverage Capital is equal to Tier 1 Capital.
Both Tier 1 Capital and Total Capital ratios are derived by dividing the respective
capital amounts by net risk-weighted assets, which are calculated as prescribed
by regulatory agencies. Tier 1 Leverage Capital ratio is calculated by dividing
the Tier 1 capital amount by average adjusted total assets for the fourth quarter
of 2002 and 2001, less non-qualifying intangibles and other adjustments.
Huntington and its subsidiaries are also subject to various regulatory requirements
that impose restrictions on cash, debt, and dividends. The Huntington National
Bank is required to maintain cash reserves based on the level of certain of
its deposits. This reserve requirement may be met by holding cash in branches
or on deposit at the Federal Reserve Bank. During 2002 and 2001, the average
balance of these deposits were $70.0 million and $72.1 million, respectively.
Under current Federal Reserve regulations, The Huntington National Bank is
limited as to the amount and type of loans it may make to the parent company
and non-bank subsidiaries. At December 31, 2002, The Huntington National Bank
could lend $261.3 million to a single affiliate, subject to the qualifying collateral
requirements defined in the regulations.
Dividends from The Huntington National Bank are one of the major sources of
funds for Huntington. These funds aid the parent company in the payment of dividends
to shareholders, expenses, and other obligations. Payment of dividends to the
parent company is subject to various legal and regulatory limitations. Regulatory
approval is required prior to the declaration of any dividends in excess of
available retained earnings. The amount of dividends that may be declared without
regulatory approval is further limited to the sum of net income for the current
year and retained net income for the preceding two years, less any required
transfers to surplus or common stock. The Huntington National Bank could declare,
without regulatory approval, dividends in 2003 of approximately $29.8 million
plus an additional amount equal to its net income through the date of declaration
in 2003.
27. PARENT COMPANY FINANCIAL STATEMENTS
The parent company condensed financial statements, which include transactions
with subsidiaries, are as follows. Huntington's statement of changes in shareholders'
equity can be found on page 66.
BALANCE SHEETS DECEMBER 31,
------------------------- -------------------------
(in thousands of dollars) 2002 2001
---------- ----------
ASSETS
Cash and cash equivalents $ 546,897 $ 155,618
Securities available for sale 40,041 50,850
Due from The Huntington National Bank 250,759 250,759
Due from non-bank subsidiaries 117,987 83,084
Investment in The Huntington National Bank 1,389,829 1,920,550
Investment in non-bank subsidiaries 453,196 462,334
Goodwill, net of accumulated amortization 9,877 9,877
Accrued interest receivable and other assets 184,611 138,435
---------- ----------
TOTAL ASSETS $2,993,197 $3,071,507
========== ==========
LIABILITIES
Short- and medium-term borrowings $ 145,556 $ 49,576
Long-term borrowed funds from subsidiary trusts 309,279 309,279
Long-term borrowed funds from unaffiliated companies -- 149,888
Dividends payable, accrued expenses, and other liabilities 348,569 220,867
---------- ----------
TOTAL LIABILITIES 803,404 729,610
---------- ----------
SHAREHOLDERS' EQUITY 2,189,793 2,341,897
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,993,197 $3,071,507
========== ==========
|
STATEMENTS OF INCOME YEAR ENDED DECEMBER 31,
------------------------- ---------------------------------------
(in thousands of dollars) 2002 2001 2000
--------- --------- ---------
INCOME
Dividends from
The Huntington National Bank $ 231,000 $ 199,404 $ 222,330
Non-bank subsidiaries 8,142 14,498 3,000
Interest from
The Huntington National Bank 29,611 20,343 20,749
Non-bank subsidiaries 5,854 4,454 2,741
Securities gains (losses) and other 877 (4,852) 66,134
--------- --------- ---------
TOTAL INCOME 275,484 233,847 314,954
--------- --------- ---------
EXPENSE
Interest on debt 20,213 29,673 36,687
Other 28,493 30,143 8,658
--------- --------- ---------
TOTAL EXPENSE 48,706 59,816 45,345
--------- --------- ---------
INCOME BEFORE INCOME TAXES AND EQUITY IN
UNDISTRIBUTED NET INCOME OF SUBSIDIARIES 226,778 174,031 269,609
Income taxes (12,970) (19,721) 10,690
--------- --------- ---------
INCOME BEFORE EQUITY IN UNDISTRIBUTED NET
INCOME OF SUBSIDIARIES 239,748 193,752 258,919
--------- --------- ---------
Equity in undistributed net income (loss) of
The Huntington National Bank 88,710 (58,353) 60,457
Non-bank subsidiaries (4,727) (603) 3,042
--------- --------- ---------
NET INCOME $ 323,731 $ 134,796 $ 322,418
========= ========= =========
|
STATEMENTS OF CASH FLOWS YEAR ENDED DECEMBER 31,
---------------------------------------
(in thousands of dollars) 2002 2001 2000
--------- --------- ---------
OPERATING ACTIVITIES
Net Income $ 323,731 $ 134,796 $ 322,418
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed net income of subsidiaries (83,983) 58,956 (63,499)
Depreciation and amortization 1,254 2,674 2,987
(Gain) loss on sales of securities available for sale (709) 5,251 (62,140)
Change in other assets and other liabilities 45,575 (60,866) 73,227
Restructuring charges 6,859 5,604 --
--------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 292,727 146,415 272,993
--------- --------- ---------
INVESTING ACTIVITIES
Decrease (increase) in investments in subsidiaries 670,000 110,019 (5,397)
Repayments from (advances to) subsidiaries 7,397 (62,419) 67,154
Purchase of securities available for sale -- (15,027) (47,000)
Proceeds from sale of securities available for sale 8,977 10,889 68,106
Proceeds from sale of other assets -- -- 11,405
--------- --------- ---------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 686,374 43,462 94,268
--------- --------- ---------
FINANCING ACTIVITIES
(Decrease) increase in short-term borrowings (4,020) (89,093) 87,342
Proceeds from issuance of medium-term borrowings 100,000 40,000 25,000
Payment of medium-term borrowings -- (25,000) --
Payment of long-term debt (150,000) -- --
Dividends paid on common stock (167,002) (190,792) (185,103)
Acquisition of treasury stock (370,012) -- (168,395)
Proceeds from issuance of treasury stock 3,212 2,662 1,055
--------- --------- ---------
NET CASH USED FOR FINANCING ACTIVITIES (587,822) (262,223) (240,101)
--------- --------- ---------
CHANGE IN CASH AND CASH EQUIVALENTS 391,279 (72,346) 127,160
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 155,618 227,964 100,804
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 546,897 $ 155,618 $ 227,964
========= ========= =========
Supplemental disclosure:
Interest paid $ 20,779 $ 31,067 $ 36,262
Income taxes paid -- -- --
Common stock issued in purchase acquisitions 19,151 -- 142,382
|
28. SEGMENT REPORTING
Huntington has three distinct lines of business: Regional Banking, Dealer
Sales, and the Private Financial Group (PFG). A fourth segment includes Huntington's
Treasury function and other unallocated assets, liabilities, revenue, and expense.
Line of business results are determined based upon Huntington's management reporting
system, which assigns balance sheet and income statement items to each of the
business segments. The process is designed around Huntington's organizational
and management structure and accordingly, the results below are not necessarily
comparable with similar information published by other financial institutions.
During 2002, the previously reported segments, Retail Banking and Corporate
Banking, were combined and renamed Regional Banking. Since this segment is managed
through six geographically defined regions where each region's management has
responsibility for both retail and corporate banking business development, combining
these two previously separate segments better reflects the management accountability
and decision making structure. In addition, changes were made to the methodologies
utilized for certain balance sheet and income statement allocations from Huntington's
management reporting system. The prior periods have not been restated for these
methodology changes.
The chief decision-makers for Huntington rely on "operating earnings"
for review of performance and for critical decision making purposes. Operating
earnings exclude the Merchant Services restructuring gain, the gain from the sale
of the Florida operations, the historical Florida operating results, and restructuring
charges. See Note 5 to the consolidated financial statements for further discussions
regarding Restructuring and Note 6 regarding the sale of Huntington's Florida
banking and insurance operations. The financial information that follows is inclusive
of the above adjustments on an after-tax basis to reflect the reconciliation to
reported net income.
The following provides a brief description of the four operating segments
of Huntington:
REGIONAL BANKING: This segment provides products and services to retail, business
banking, and commercial customers. This segment's products include home equity
loans, first mortgage loans, direct installment loans, business loans, personal
and business deposit products, as well as sales of investment and insurance
services. These products and services are offered in six operating regions within
the five states of Ohio, Michigan, Indiana, West Virginia, and Kentucky through
Huntington's traditional banking network, Direct Bank--Huntington's customer
service center, and Web Bank at www.huntington.com. Regional Banking also represents
middle-market and large commercial banking relationships which use a variety
of banking products and services including, but not limited to, commercial loans,
international trade, and cash management.
DEALER SALES: This segment serves automotive dealerships within Huntington's
primary banking markets, as well as in Arizona, Florida, Georgia, Pennsylvania,
and Tennessee. This segment finances the purchase of automobiles by customers
of the automotive dealerships, purchases automobiles from dealers and simultaneously
leases the automobile under long-term operating and direct financing leases,
finances the dealership's inventory of automobiles, and provides other banking
services to the automotive dealerships and their owners.
PRIVATE FINANCIAL GROUP: This segment provides products and services designed
to meet the needs of Huntington's higher wealth customers. Revenue is derived
through the sale of personal trust, asset management, investment advisory, brokerage,
insurance, and deposit and loan products and services. Income and related expenses
from the sale of brokerage and insurance products is shared with the line of
business that generated the sale or provided the customer referral.
TREASURY / OTHER: This segment includes assets, liabilities, equity, revenue,
and expense that are not directly assigned or allocated to one of the lines
of business. Since a match-funded transfer pricing system is used to allocate
interest income and interest expense to other business segments, Treasury /
Other results include the net impact of any over or under allocations arising
from centralized management of interest rate risk including the net impact of
derivatives used to hedge interest rate sensitivity. Furthermore, this segment's
results include the net impact of administering Huntington's investment securities
portfolio as part of overall liquidity management. Additionally, amortization
expense of intangible assets and gains or losses not allocated to other business
segments are also a component.
Listed below is certain operating basis financial information reconciled to Huntington's
2002, 2001, and 2000 reported results by line of business:
INCOME STATEMENTS Regional Dealer Treasury/ Huntington
(in thousands of dollars) Banking Sales PFG Other Consolidated
----------- ----------- ----------- ----------- ------------
2002
Net interest income $ 573,456 $ 6,782 $ 35,403 $ 124,209 $ 739,850
Provision for loan losses 141,190 44,573 3,477 -- 189,240
Non-Interest income 263,824 687,061 108,817 61,639 1,121,341
Non-Interest expense 525,162 609,257 100,961 69,584 1,304,964
Income taxes 59,825 14,001 13,924 (472) 87,278
----------- ----------- ----------- ----------- -----------
Operating earnings 111,103 26,012 25,858 116,736 279,709
Gain on sale of Florida operations -- -- -- 61,422 61,422
Merchant Services restructuring gain -- -- -- 15,957 15,957
Restructuring and special charges -- -- (3,429) (28,403) (31,832)
Florida operations sold 1,270 790 1,428 (5,013) (1,525)
----------- ----------- ----------- ----------- -----------
Reported earnings $ 112,373 $ 26,802 $ 23,857 $ 160,699 $ 323,731
=========== =========== =========== =========== ===========
2001
Net interest income $ 596,884 $ (30,728) $ 36,323 $ 30,536 $ 633,015
Provision for loan losses 96,943 29,655 408 -- 127,006
Non-Interest income 257,801 712,444 91,986 65,969 1,128,200
Non-Interest expense 490,943 637,979 94,025 96,636 1,319,583
Income taxes 93,380 4,928 11,857 (42,112) 68,053
----------- ----------- ----------- ----------- -----------
Operating earnings 173,419 9,154 22,019 41,981 246,573
Restructuring charges (43,751) (45,870) (6,402) (1,741) (97,764)
Florida operations sold 19,761 2,902 5,663 (42,339) (14,013)
----------- ----------- ----------- ----------- -----------
Reported earnings (loss) $ 149,429 $ (33,814) $ 21,280 $ (2,099) $ 134,796
=========== =========== =========== =========== ===========
2000
Net interest income $ 625,500 $ (49,821) $ 30,502 $ (28,717) $ 577,464
Provision for loan losses 36,180 17,098 1,279 -- 54,557
Non-Interest income 271,096 656,262 57,442 91,660 1,076,460
Non-Interest expense 537,331 523,387 53,866 39,467 1,154,051
Income taxes 111,438 22,965 11,343 (20,441) 125,305
----------- ----------- ----------- ----------- -----------
Operating earnings 211,647 42,991 21,456 43,917 320,011
Florida operations sold 61,630 3,067 1,449 (63,739) 2,407
----------- ----------- ----------- ----------- -----------
Reported earnings (loss) $ 273,277 $ 46,058 $ 22,905 $ (19,822) $ 322,418
=========== =========== =========== =========== ===========
|
BALANCE SHEETS AVERAGE ASSETS AVERAGE DEPOSITS
------------------------------- -------------------------------
(in millions of dollars) 2002 2001 2000 2002 2001 2000
------- ------- ------- ------- ------- -------
Regional Banking $13,336 $12,708 $11,839 $14,940 $13,850 $13,797
Dealer Sales 6,658 6,495 6,576 46 34 76
PFG 1,022 782 586 807 661 600
Treasury / Other 4,470 4,879 6,506 808 269 901
------- ------- ------- ------- ------- -------
Subtotal 25,486 24,864 25,507 16,601 14,814 15,374
Florida 437 3,213 3,153 583 4,547 4,316
------- ------- ------- ------- ------- -------
Total $25,923 $28,077 $28,660 $17,184 $19,361 $19,690
======= ======= ======= ======= ======= =======
|
29. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts and estimated fair values of Huntington's financial instruments,
including the fair values of derivatives used to hedge related fair values or
cash flows, at December 31 are presented in the following table:
2002 2001
------------------------------ ------------------------------
CARRYING FAIR CARRYING FAIR
(in thousands of dollars) AMOUNT VALUE AMOUNT VALUE
------------ ------------ ------------ ------------
FINANCIAL ASSETS:
Cash and short-term assets $ 1,056,063 $ 1,056,063 $ 1,242,846 $ 1,242,846
Trading account securities 241 241 13,392 13,392
Mortgages held for sale 528,379 528,379 629,386 629,386
Securities 3,410,915 3,411,201 2,861,901 2,862,348
Loans and leases 18,250,755 18,995,327 18,098,587 18,575,447
Customers' acceptance liability 16,745 16,745 13,670 13,670
FINANCIAL LIABILITIES:
Deposits (17,499,326) (17,653,972) (20,187,304) (20,317,155)
Short-term borrowings (2,541,016) (2,541,016) (1,955,926) (1,955,926)
Bank acceptances outstanding (16,745) (16,745) (13,670) (13,670)
Medium-term notes (2,045,123) (2,051,704) (1,795,002) (1,802,381)
Subordinated notes and other long-term debt (1,801,678) (1,872,101) (944,330) (1,002,830)
Capital securities (300,000) (310,392) (300,000) (299,048)
|
The terms and short-term nature of certain assets and liabilities result in
their carrying value approximating fair value. These include trading account
securities, customers' acceptance liabilities, short-term borrowings, bank acceptances
outstanding, and cash and short-term assets, which include cash and due from
banks, interest-bearing deposits in banks, and federal funds sold and securities
purchased under resale agreements. Loan commitments and letters of credit generally
have short-term, variable rate features and contain clauses that limit Huntington's
exposure to changes in customer credit quality. Accordingly, their carrying
values, which are immaterial at the respective balance sheet dates, are reasonable
estimates of fair value.
Certain assets, the most significant being operating lease assets, Bank owned
life insurance and premises and equipment, do not meet the definition of a financial
instrument and are excluded from this disclosure. Similarly, mortgage and non-mortgage
servicing rights, deposit base, and other customer relationship intangibles
are not considered financial instruments and are not discussed below. Accordingly,
this fair value information is not intended to, and does not, represent Huntington's
underlying value. Many of the assets and liabilities subject to the disclosure
requirements are not actively traded, requiring fair values to be estimated
by management. These estimations necessarily involve the use of judgment about
a wide variety of factors, including but not limited to, relevancy of market
prices of comparable instruments, expected future cash flows, and appropriate
discount rates.
The following methods and assumptions were used by Huntington to estimate
the fair value of the remaining classes of financial instruments:
Mortgages held for sale--valued using outstanding commitments from investors.
Securities available for sale and investment securities--based on quoted market
prices, where available. If quoted market prices are not available, fair values
are based on quoted market prices of comparable instruments. Retained interests
in securitized assets are valued using a discounted cash flow analysis. The
carrying amount and fair value of securities exclude the fair value of asset/liability
management interest rate contracts designated as hedges of securities available
for sale.
Loans and leases--variable rate loans that reprice frequently are based on
carrying amounts, as adjusted for estimated credit losses. The fair values for
other loans and leases are estimated using discounted cash flow analyses and
employ interest rates currently being offered for loans and leases with similar
terms. The rates take into account the position of the yield curve, as well
as an adjustment for prepayment risk, operating costs, and profit. This value
is also reduced by an estimate of probable losses in the loan and lease portfolio.
Deposits--demand deposits, savings accounts, and money market deposits are,
by definition, equal to the amount payable on demand. The fair values of fixed
rate time deposits are estimated by discounting cash flows using interest rates
currently being offered on certificates with similar maturities.
Debt--fixed rate long-term debt, as well as medium-term notes and Capital Securities,
are based upon quoted market prices or, in the absence of quoted market prices,
discounted cash flows using rates for similar debt with the same maturities. The
carrying amount of variable rate obligations approximates fair value.
GLOSSARY OF SELECTED FINANCIAL TERMS
ALLOWANCE FOR LOAN AND LEASE LOSSES - The reserve established by management
to cover unrecognized credit losses inherent in the loan and lease portfolio.
BOOK VALUE PER COMMON SHARE -Total common shareholders' equity divided by
the total number of common shares outstanding.
COMMON SHARES OUTSTANDING - Total number of shares of common stock issued
less common shares held in treasury.
CORE DEPOSITS - Total deposits, excluding foreign deposits, brokered time
deposits, negotiable certificates of deposit and domestic time deposits greater
than $100,000.
DERIVATIVE - A contractual agreement between two parties to exchange cash
or other assets in response to changes in an external factor, such as an interest
rate or a foreign exchange rate.
DIVIDEND PAYOUT RATIO - Dividends per common share divided by net income per
diluted common share.
EFFECTIVE TAX RATE - Income tax expense divided by income before taxes.
EFFICIENCY RATIO - Non-interest expense (excluding restructuring charges and
amortization of intangible assets) divided by the sum of fully taxable equivalent
net interest income and non-interest income (excluding net securities transactions,
gain on sale of Florida operations, Merchant Services gain, and gain on the
sale of credit card portfolio).
GOODWILL - The excess of the purchase price of net assets over the fair value
of net assets acquired in a business combination.
NET CHARGE-OFFS - Loan and lease losses less related recoveries of loans and
leases previously charged off.
NET INCOME PER COMMON SHARE -
BASIC - Net income divided by the number of weighted-average common shares outstanding.
DILUTED - Net income divided by the sum of weighted-average common shares
outstanding plus the effect of common stock equivalents that have the potential
to be converted into common shares outstanding.
NET INTEREST INCOME - The difference between interest income and interest
expense.
NET INTEREST MARGIN - Net interest income on a fully taxable equivalent basis
divided by total average earning assets.
NON-PERFORMING ASSETS - Loans and leases on which interest income is not being
accrued for financial reporting purposes; loans for which the interest rates
or terms of repayment have been renegotiated; and real estate which has been
acquired through foreclosure.
PROVISION FOR LOAN AND LEASE LOSSES - The periodic expense needed to maintain
the level of the allowance for loan and lease losses.
REPORTED BASIS - Amounts presented in accordance with accounting principles
generally accepted in the United States (GAAP).
RESIDUAL VALUE - The expected value of a leased asset at the end of the lease
term.
RETURN ON AVERAGE ASSETS - Net income as a percent of average total assets.
RETURN ON AVERAGE EQUITY - Net income as a percent of average shareholders'
equity.
SERVICING RIGHT - A contractual agreement to provide certain billing, bookkeeping
and collection services with respect to a pool of loans.
TANGIBLE EQUITY RATIO - Total equity less intangible assets, primarily goodwill,
divided by total assets less intangible assets.
TIER 1 LEVERAGE RATIO - Tier 1 Risk-Based Capital divided by average adjusted
quarterly total assets. Average adjusted quarterly assets are adjusted to exclude
non-qualifying intangible assets.
TIER 1 RISK-BASED CAPITAL - Total shareholders' equity (excluding unrealized
gains and losses on securities available for sale) less non-qualifying goodwill
and other intangibles.
TOTAL RISK-ADJUSTED ASSETS - The sum of assets and credit equivalent off-balance
sheet amounts that have been adjusted according to assigned regulatory risk
weights, excluding the non-qualifying portion of allowance for loan and lease
losses, goodwill and other intangible assets.
TOTAL RISK-BASED CAPITAL - Tier 1 Risk-Based Capital plus qualifying long-term
debt and the allowance for loan and lease losses.
TREASURY STOCK - Common stock repurchased and held by the issuing corporation
for possible future issuance.
GLOSSARY OF SELECTED FINANCIAL TERMS
OTHER FINANCIAL TERMS
For analytical purposes, including understanding performance trends, decision-making,
and peer comparison, management makes certain adjustments to some data. The
following terms define some of those adjustments.
ANNUALIZED - A return, yield, performance ratio, or growth rate for a time
period less than one year that is adjusted to represent an annual time period.
Returns, yields, performance ratios, and growth rates are typically quoted on
an annual basis for analytical purposes and for performance comparisons to competitors.
FULLY TAXABLE EQUIVALENT INTEREST INCOME - Income from tax-exempt earning
assets that has been increased by an amount equivalent to the taxes that would
have been paid if this income had been taxable at statutory rates. This adjustment
puts all earning assets, most notably tax-exempt municipal securities, on a
common basis that facilitates comparison of net interest margin to competitors.
OPERATING BASIS - Reported (GAAP) basis amount excluding impact of certain
gains and restructuring charges. By excluding certain items, management views
operating basis to be a useful indicator of underlying, or run-rate, business
trends. See details beginning on page 52.
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not Applicable.